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Jiyajeerao Cotton Mills Ltd. Vs. Company Law Board and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Petition No. 558 of 1967
Judge
Reported in1969MPLJ295
ActsCompanies Act, 1956 - Sections 197, 237 and 269
AppellantJiyajeerao Cotton Mills Ltd.
RespondentCompany Law Board and ors.
Appellant AdvocateS.S. Ray, ;Maya Ray, ;Rama Ghose, ;S.R. Jhunjhunwala, ;K.A. Chitaley and ;V.S. Dabir, Advs.
Respondent AdvocateNiren De, Attorney-General, ;Y.S. Dharmadhikari and ;J.P. Dubey, Advs.
DispositionPetition allowed
Cases ReferredBarium Chemicals Ltd. v. Company Law Board
Excerpt:
- motor vehicles act, 1988[c.a.no.59/1988] section 166; [a.k. patnaik, cj, a.k. gohil & s. samvatsar, jj] application for compensation for personal injury death of injured claimant subsequently for some other reasons held, claim for personal injury will abate on the death of claimant. claim will not survive to his legal representative except as regards claim for pecuniary loss to estate of claimant. - 8,25,00,000 ;its reserves, assets and production capacity have also increased considerably since its incorporation and it has at present 59,204 spindles and 1,711 looms besides modern and well-equipped dyeing, bleaching, printing and power generating plants. as managing agents was done only after the respondents were fully satisfied that the petitioner's business was being managed,.....dixit, c.j.1. by this application under article 226 of the constitution of india the petitioner, m/s. jiyajeerao cotton mills ltd., gwalior (hereinafter referred to as ' the company '), challenges the legality of an order made by the company law board (hereinafter referred to as ' the board ') on 7th december, 1967, under section 237(b) of the companies act, 1956 (hereinafter referred to as the act), directing that the affairs of the company be investigated by the inspectors appointed by the order and seeks a writ of certiorari for quashing that order.2. the petitioner-company was incorporated as a public limited company under the provisions of the gwalior companies act in the quondam gwalior state with the object of carrying on the business of spinning, weaving, ginning, baling and.....
Judgment:

Dixit, C.J.

1. By this application under Article 226 of the Constitution of India the petitioner, M/s. Jiyajeerao Cotton Mills Ltd., Gwalior (hereinafter referred to as ' the company '), challenges the legality of an order made by the Company Law Board (hereinafter referred to as ' the board ') on 7th December, 1967, under Section 237(b) of the Companies Act, 1956 (hereinafter referred to as the Act), directing that the affairs of the company be investigated by the inspectors appointed by the order and seeks a writ of certiorari for quashing that order.

2. The petitioner-company was incorporated as a public limited company under the provisions of the Gwalior Companies Act in the quondam Gwalior State with the object of carrying on the business of spinning, weaving, ginning, baling and pressing of cotton, yarn, hemp, jute and other fibrous material; upon its incorporation it started a textile mill at Gwalior of which M/s. Birla Brothers Ltd. were the managing agents. The present business of the company consists, inter alia, of the manufacture and production of textiles at Gwalior in Madhya Pradesh and caustic soda and soda ash at Porbunder in Gujarat. Since 1st July, 1948, M/s. Birla Brothers (Gwalior) Ltd. are the managing agents of the company in place and stead of M/s. Birla Brothers Ltd. The company claims that whereas its original authorized share capital was Rs. 35,00,000 its present authorized share capital isRs. 8,25,00,000 ; its reserves, assets and production capacity have also increased considerably since its incorporation and it has at present 59,204 spindles and 1,711 looms besides modern and well-equipped dyeing, bleaching, printing and power generating plants. The petitioner further claims that it has also set up four ginning and pressing factories--one in the Punjab, two in Madhya Pradesh and one in Rajasthan--and that it has also installed a chemical plant at Porbunder in Gujarat. According to the petitioner, the manner in which its managing agents have managed and conducted its business has been under the scrutiny and consideration of the Union of India and the board from time to time, and the board duly accorded its approval for the reappointment of M/s. Birla Brothers (Gwalior) Ltd. as the managing agents even though the general policy of the Union of India and of the board was not to reappoint the managing agents of textile mill companies ; the last order reappointing M/s. Birla Brothers (Gwalior) Ltd. as managing agents till 31st December, 1969, was passed on 15th September, 1966. The petitioner claims that the reappointment of M/s. Birla Brothers (Gwalior) Ltd. as managing agents was done only after the respondents were fully satisfied that the petitioner's business was being managed, conducted and carried on in a proper and efficient manner and that it would not be against public policy or public interest to allow M/s. Birla Brothers (Gwalior) Ltd. to continue to run the petitioner's business.

3. After giving details of the report of the analysis conducted by the research and statistics division of the Company Law Board and of the publications that appeared in the Economic Times about its working on sound business and commercial principles, its business being managed and conducted honestly and efficiently and its steady progress, the petitioner company proceeds to say that it has built up great credit, goodwill and reputation in the business world ; that its manufacturing business is being carried on successfully, honestly and efficiently and that the persons connected with its affairs are persons of business reputation who have throughout been fully alive to the real interest of the company as well as the interest of trade, industry and business in India.

4. According to the petitioner, during and after the last general elections a persistent propaganda was carried on by certain interested and politically motivated persons against the petitioner and a group described by the propagandists as ' Birla Group of Textile Mills ', and the petitioner and its managing agents were falsely and maliciously accused of indulging in monopolistic industrial activities and since then constant demands were being made by these persons to humiliate the petitioner company and its managing agents on some excuse or the other. The petitioner has given a narration of the simultaneous raids that were conducted in various textile mills of ' Birla group ' in India, including the petitioner-mills, on 15th June, 1967by the Central Bureau of Investigation and the seizure of books, documents, papers, etc., made in the raids and the proceedings that followed in this court and in the High Court of Gujarat in which the legality of the raids and the seizures made therein was challenged. In Misc. Petition No. 415 of 1967 which was filed in this court the order that was passed on 20th January, 1968, was in the following terms :

' Learned counsel appearing for the parties agreed before us that an order on the lines passed by the Supreme Court in S. K. Rattan v. New Swadesh Mills, Civil Appeal No. 1702 of 1967, decided on 4th January, 1968 should be passed in this case as a working arrangement and that, as a consequence of this working arrangement, the grounds of attack raised in the petition in respect of the alleged contravention of Section 165 of the Code of Criminal Procedure shall be deemed to have been concluded, but the petitioner shall be at liberty to press the other grounds raised in the petition.

We order accordingly and further direct, without prejudice to the rights and contentions of the petitioner regarding the validity of the investigation or otherwise and without prejudice to the rights of the respondents to approach the court of the Additional District Magistrate, Gwalior, for such orders for production of documents, etc., as they may be advised to take, and in supersession of the order made by this court on 27th October, 1967, with regard to the sealing of documents seized by the opponents from the petitioner, that-

(1) All the documents, papers, books and articles, etc., seized by the respondent No. 1 under the search warrant issued by respondent No. 2 on 13th and/or 15th June, 1967, from M/s. Jiyajeerao Cotton Mills, Gwalior, shall be returned forthwith to the petitioner after they are initialled in the manner stated herein by the Additional District Magistrate, Gwalior, or any other person authorized by him in this behalf. All the books, registers and files which are in a bound condition shall be initialled on the first and last pages by the learned Magistrate in such manner as may be deemed proper by him before they are returned to the petitioner, provided, however, that the Magistrate may initial every page of such document as may be deemed proper by him at the request of the investigating officer and after hearing the petitioner.

(2) Shri Makharia, the secretary of the petitioner, through the petitioner's counsel undertakes to produce any documents and papers which the Magistrate may order the petitioner to produce.

The Magistrate will be at liberty to give such further directions as to the said documents so produced before him as he may deem fit.

This arrangement will enure for the duration of the investigation. The documents will thereafter be at the disposal of the court in which criminalproceedings, if any, are initiated as a result of the investigation. If no proceedings for prosecution of the accused are initiated pursuant to the investigation on hand, the Additional District Magistrate will pass appropriate orders relating to the papers.'

5. On 22nd September, 1967, the Company Law Board made an order under Section 209(4)(b)(ii) of the Act authorizing the officers specified in the order, namely, respondents Nos. 7, 8 and 9, to inspect the books of account and other books and papers of the petitioner-company. The petitioner-company says that the respondents Nos. 7, 8 and 9 came to its mills at Gwalior in September/October, 1967, and examined the records, documents, papers and registers of the company and also examined and interrogated some of its officers and employees even though they were not authorized to examine or interrogate them ; that it allowed them to do so without any objection and extended all co-operation and facilities to the said respondents. It is the complaint of the petitioner that, though by a letter dated 19th October, 1967, addressed to the Chairman of the Company Law Board, it offered to give further information and particulars that might be required by the board, no further particulars were called for from it; that no reply was ever sent to the letter dated 19th October, 1967, and that despite its repeated requests, a copy of the report said to have been made by the respondents Nos. 7, 8 and 9 to the board was not furnished to it.

6. The order impugned was made by the board on 7th December, 1967. The order runs thus :--

' WHEREAS, in the opinion of the Company Law Board, there are circumstances suggesting that the persons concerned in the management of the affairs of Messrs. Jiyajeerao Cotton Mills Ltd., having its registered office at Gwalior (hereinafter referred to as the ' company '), have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company and its members ;

AND WHEREAS the Company Law Board considers it desirable that inspectors should be appointed to investigate into the affairs of the company and to report thereon.

Now THEREFORE, in exercise of the powers conferred by Clause (b) of Section 237 of the Companies Act, 1956 (1 of 1956), read with notification of the Government of India in the Ministry of Finance (Department of Company Affairs and Insurance) No. G.S.R. 72 dated the 1st January, 1966, the Company Law Board hereby appoints Sarva Shri P.K. Mallik, Joint Director of Inspection, Calcutta, S. V. Vijayaraghavan, at present Registrar of Companies, Madras, and A.R. Khare, Accounts Officer, Official Liquidator's Office, Bombay, as inspectors to investigate into the affairs of the company and to report thereon to the Company Law Board pointing out, inter alia, all irregularities and contraventions in respect of the provisions of the Companies Act, 1956, or of the Indian Companies Act, 1913, or any other law for the time being in force and the person or persons who are responsible for such irregularities and contraventions.

The inspectors shall complete the investigation and submit six typed copies of their report to the Company Law Board within three months from the date of issue of this order. The Company Law Board hereby reserves the right to extend the above mentioned period from time to time, if and when considered necessary.

The inspectors will be at liberty to exercise their powers jointly and/or severally. '

7. On 14th December, 1967, the petitioner addressed two letters, one to the respondent No. 1, the Chairman of the Company Law Board, and the other to the respondent No. 2, the Secretary of the Company Law Board, challenging the impugned order as bad, illegal and without jurisdiction, called upon the respondents to disclose the circumstances and grounds on which the board was said to have formed the opinion stated in the impugned order and asked the respondents to recall the order. The board refused to disclose the circumstances or grounds upon which it was supposed to have formed the requisite opinion for investigation under Section 237(b) of the Act.

8. It would be convenient here to refer to Section 237 of the Act which is as follows:

'237. Without prejudice to its powers under Section 235, the Central Government-

(a) shall 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, if-

(i) the company, by special resolution ; or

(ii) the court, by order,

declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and

(b) may do so if, in the opinion of the Central Government, there are circumstances suggesting-

(i) that the business of the company is being conducted with intent to defraud its creditors, members, or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose;

(ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or

(iii) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company. '

9. We are not concerned with Clause (a) of Section 237. The material provision here is Sub-clause (ii) of Clause (b) of Section 237. It will be seen that the power conferred by Section 237(b) to direct an investigation into the affairs of a company is a discretionary power ; but the provision does not give to the Government a complete and unexaminable discretion. Before exercising the power under Clause (b) of Section 237 of directing an investigation into the affairs of a company, the Government must first form an opinion that an investigation is necessary and that opinion must be founded on circumstances suggesting the inferences described in the three sub-clauses of Clause (b). If no opinion is formed and if there are no circumstances suggesting any of the prescribed inferences, then the Government has no jurisdiction to make an order under Section 237 directing an investigation into the affairs of a company. The court cannot test the opinion of the Government that an investigation is necessary ; but it can always examine the basis for the opinion, and if it can be shown that circumstances suggesting any of the prescribed inferences do not exist or that the circumstances are such that it was impossible for anyone or the Government to reasonably have formed any opinion on their basis suggestive of the matters enumerated in Section 237(b), then the action taken under Section 237(b) must fall, since its foundation has been removed. This is the view which has been expressed by the Supreme Court in two cases, namely, Barium Chemicals Ltd. v. Company Law Board, [1966] Supp. S.C.R. 311 ; [1966] 36 Comp. Cas. 639, 661 ; A.T.R. 1967 S.C. 295, 309 and Rohias Industries Ltd. v. S.D. Agarwal, [1969] 39 Comp. Cas. 781 (S.C.).

10. In the case of Barium Chemicals Ltd. the view which Sarkar C.J. and Mudholkar J. expressed and which view was placed in the forefront of the argument of the learned Attorney-General before us, was that the power conferred on the Government under Section 237(b) was a discretionary power and that no aspect of it was open to judicial review. On the other hand, Hidayatullah J. (as he then was) and Shelat J. held that the formation of opinion under Section 237(b) was no doubt subjective, but the existence of circumstances relevant to the inference on which the opinion was founded could always be enquired into by the court. In regard to the scope of Section 237, Hidayatullah J. (the present Chief Justice) said:

' In dealing with this problem the first point to notice is that the power is discretionary and its exercise depends upon the honest formation of anopinion that an investigation is necessary. The words ' in the opinion of the Central Government' indicate that the opinion must be formed by 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, or

(ii) members, or

(iii) any other person;

(b) that the business is being conducted-

(i) for a fraudulent purpose, or

(ii) for an 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 the Central Government. No jurisdiction, outside the section, which empowers the initiation of investigation, can be exercised. An action, not based on circumstances suggesting an inference of the enumerated kind will not be valid. In other words, the enumeration of the inferences, which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstance leading to an inference of the kind contemplated by the section exists, the action might be exposed to interference unless the existence of the circumstances is made out. As my brother Shelat J. has put it trenchantly :

' It is not reasonable to say that the clause permitted the Government to say that it has formed the opinion on circumstances which it thinks exist......' Since the existence of ' circumstances ' is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to assert that the circumstances exist and give no clue to what they are because the circumstances must be such as to lead to conclusions of certain defmiteness. The conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct or the withholding of information of a particular kind. We have to see whether the chairman in his affidavit has shown the existence of circumstances leading to such tentative conclusions. If he has, his action cannot be questioned because the inference is to be drawn subjectively and even if this court would not have drawn a similar inference that fact could be irrelevant. But if the circumstances pointed out are such that no inference of the kind stated in Section 237(b) can at all be drawn the action would be ultra vires the Act and void. '

11. Shelat J. summed up his conclusion on this point thus :

' There must therefore exist circumstances which in the opinion of the authority suggest what has been set out in Sub-clauses (i), (ii) or (iii). If it is shown that the circumstances do not exist or that they are such that it is impossible for any one to form an opinion therefrom suggestive of the aforesaid things, the opinion is challengeable on the ground of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute. '

12. In Barium Chemicals Ltd. Bachawat J. did not deal specifically with the question of the scope and construction of Section 237(b). But the concluding observations of the judgment pronounced by him seem to show that in his view the court could always enquire, in any case, whether the Government could reasonably have formed the opinion on the material before it. He said:

' No reasonable person who had given proper consideration to these circumstances could have formed the opinion that they suggested any fraud as mentioned in the order dated May 19, 1965. Had the chairman applied his mind to the relevant facts, he could not have formed this opinion. I am, therefore, inclined to think that he formed the opinion without applying his mind to the facts. An opinion so formed by him is in excess of his powers and cannot support an order under Section 237(b). The appeal is allowed, and the impugned order is set aside. I concur in the order which Shelat J. proposes to pass. '

13. The recent decision of the Supreme Court in Rohtas Industries Ltd, v. S.D. Agarwal, however, places beyond doubt the position that the existence of circumstances on which the opinion is founded are always open to judicial review. In that case Hegde J., with whom Sikri J. agreed, after pointing out that Sections 235 to 237 were allied Sections and formed a scheme, said:

' From the provisions contained in Sections 235 and 236 it is clear that the legislature considered that investigation into the affairs of a company is a very serious matter and it should not be ordered except on good grounds. It is true that the investigation under Section 237(b) is of a fact-finding nature. The report submitted by the inspector does not bind anybody. The Government is not required to act on the basis of that report, the company has to be called upon to have its say in the matter but yet the risk--it may be a grave one--is that the appointment of an inspector is likely to receive much press publicity as a result of which the reputation and prospects of the company may be adversely affected. It should not therefore be ordered except on satisfactory grounds.

Before taking action under Section 237(b)(i) and (ii), the Central Government has to form an opinion that there are circumstances suggesting that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose or in a manner oppressive to any member or that the company was formed for any fraudulent or unlawful purpose or that the persons concerned in the formation or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members.........

The power under Sections 235 to 237 has been conferred on the Central Government on the faith that it will be exercised in a reasonable manner. The department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore, the standard that is prescribed under Section 237(b) is not the standard required of an ordinary citizen but. that of an expert. The learned Attorney-General did not dispute the position that if we come to the conclusion that no reasonable authority would have passed the impugned order on the material before it then the same is liable to be struck down. '

14. He then referred to the views expressed by the judges in the case of Barium Chemicals Ltd.a and to several Indian and English decisions and proceeded to observe:

' Coming back to Section 237(b), in finding out its true scope, we have to bear in mind that that section is a part of the scheme referred to earlier and therefore the said provision takes its colour from Sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. In interpreting Section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally, we must also rememberthat the section in question is an inroad on the powers ol the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under Article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interest of the general public. In fact the vires of that provision was upheld by a majority of the judges constituting the Bench in Barium Chemicals' case principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated 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. '

15. In the case of Rohtas Industries Ltd.z Bachawat J. expressed himself thus :

' The conditions for the exercise of the statutory power are clearly stated in Section 237(b). It is well to bear in mind, firstly, that Section 237(b) confers an administrative and not a judicial power ; secondly, that the power is discretionary ; thirdly, that the object of the investigation is to find out whether in fact, fraud, etc., have been committed by persons in relation to the company's affairs; fourthly, that the condition for making the order is the opinion of the Central Government that there are circumstances suggesting fraud, etc., arid, lastly, that there is no appeal from such opinion to the court. The law recognises certain well recognised principles within which the discretionary power under Section 237(b) must be exercised. There must be a real exercise of the discretion. The authority must be exercised honestly and not for corrupt or ulterior purposes. The authority must form the requisite opinion honestly and after applying its mind to the relevant materials before it. In exercising the discretion the authority must have regard only to circumstances suggesting one or more of the matters specified in Sub-clauses (i), (ii) and (iii). It must act reasonably and not capriciously or arbitrarily. It will be an absurd exercise of discretion, if, for example, the authority forms the requisite opinion on the ground that the directorin charge of the company Is a member of a particular community. Within these narrow limits the opinion is not conclusive and can be challenged in a court of law. Had Section 237(b) made the opinion conclusive, it might be open to challenge as violative of articles 14 and 19 of the Constitution: see Corporation of Calcutta v. Calcutta Tramways Co. Ltd., [1964] 5 S.C.R. 25 distinguishing Joseph Kuruvitla Vellukunnel v. Reserve Bank of India, [1962] Supp. 3 S.C.R. 632 ; 32 Comp. Cas. 514. Section 237(b) is not violative of articles 14 and 19.

If it is established that there were no materials upon which the authority could form the requisite opinion the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under Section 237(b) is not fulfilled. On this ground I interfered with the order under Section 237(b) in Barium Chemicals Ltd. v. Company Law Board. ....

The relevant matter is ' the opinion of the Central Government'. The condition precedent to the exercise of power under Section 237(b) is the opinion of the Government and not the existence of the circumstances suggesting one or more of the specified matters. To hold that the factual existence of such matters is a condition precedent to the exercise of the power is to re-write the section. '

16. It is in the light of the test laid down by Hidayatullah J. (as he then was) and Shelat J. in Barium Chemicals Ltd. v. Company Law Board and adopted in Rohtas Industries Ltd. v. S.D. Agarwal , that the validity of the impugned order passed against the petitioner-company by the Board under Section 237(b)(U) of the Act on 7th December, 1967, must be judged. Accordingly, if it be found that circumstances relevant to the inference specified in Sub-clause (ii) of Clause (b) of Section 237 did not exist or that the circumstances on which the Government formed its opinion were irrelevant or were not such as to lead to conclusions of ' certain definitions ' about fraud, misfeasance or misconduct on the part of persons in the management of the affairs of the company towards the company or towards any of its members or that an expert body like the Company Law Board could not have reasonably made the impugned order on the basis of the material before it, then it must be held that the Company Law Board did not form the requisite opinion in accordance with law and the impugned order is invalid.

17. In the return filed by the respondents most of the averments made by the petitioner have been replied by a general denial or pleading ' no knowledge '. The petitioner has, in refutation of the first paragraph of the impugned order, stated in paragraph 49 of the petition that there were and are no circumstances whatsoever suggesting that the person or personsconcerned in the management of the company's affairs has or have in connection therewith been guilty of any fraud, misfeasance or misconduct towards the company or its members; the impugned order has been passed on no basis whatsoever and there are no grounds or circumstances existing which can in the remotest manner justify the passing of the impugned order; no reasonable person could or would have passed the impugned order. The reply of the respondents to these statements of the petitioner is contained in paragraph 48 of the return wherein the circumstances which persuaded the Government to pass the impugned order have been narrated.

18. Broadly stated the circumstances are three. The respondents first say that the petitioner-company was the managing agents of the Investment Corporation Ltd., a company incorporated in 1948 under the Jaipur Companies Act, 1942, having its registered office at Pilani (hereinafter referred to as 'the Pilani company'); in 1948 the board of directors of the petitioner-company and the Pilani company included, among others, Shri L.N. Birla and Shri M.P. Birla ; Birla Brothers (Gwalior) Ltd. were the managing agents of the petitioner-company and thus the entire control and management of these three companies including Birla Brothers (Gwalior) Ltd. was with Birla Brothers (Gwalior) Ltd. which was manned by the members of the family of Birlas ; in the Pilani company the nominal amount of the shares to be allotted was shown as Rs. 0.37 crores for 3,70,000 shares of Rs. 10 each ; out of these shares the petitioner-company purchased 3,69,846 shares at Rs. 100 each, that is at a premium of Rs. 90 per share; the total amount paid by the petitioner-company was Rs. 3,69,84,600 and the allotment was between 12th August, 1948, and 23rd August, 1948. The respondents further say that in the annual statement of accounts published by the petitioner-company with the directors' report in March, 1949, the accounts have been shown up to 30th June, 1948 ; in the directors'report there was an offer to the shareholders of the petitioner-company that they could accept the shares of the Pilani company held by the petitioner in lieu of cash dividends but it was not disclosed therein that the petitioner-company had purchased the shares of the Pilani company at a premium and had in fact diverted an amount of Rs. 3,69,84,600 towards the purchase of the shares of the Pilani company ; the fact of this investment in the Pilani company's shares was also not disclosed in the balance-sheet or the annual statement of accounts ending with 3Ist March, 1949. Referring to the balance-sheet of the year ending with 31st March, 1949, the respondents say that:

' ......there is one consolidated figure of written down value of totalinvestments and that is shown as Rs. 57,00,000 only. It cannot be a fact that the value of 3,69,846 shares which were purchased at Rs. 3,69,84,600 will dwindle down to Rs. 57 lakhs within a span of 6 months. It is also not clear that the written down value mentioned in the balance-sheet ending with 31st March, 1949, shown at Rs. 57 lakhs related exclusively to the investments in the Investment Corporation Ltd. '

19. In sub-paragraph (ix) of paragraph 48 of the return it has been stated :

The Company Law Board, therefore, has taken this circumstance to suggest that the true position has been concealed from the shareholders of the petitioner-company. The fact that the shares of the Investment Corporation Ltd. were purchased at a higher premium was not at all disclosed to the shareholders when an offer was made to the shareholders in March, 1949, to accept the dividend in cash or shares of the Investment Corporation Ltd. held by the petitioner-company in lieu of cash payments. Had this fact been revealed from the annual statement of accounts or by any statement anywhere, the majority of shareholders of J. C. Mills Ltd. would have been in a position to exercise their option in better way to accept the shares in Investment Corporation Ltd., which were in fact of greater value that the payments of dividend in cash. This concealment of the true position dissuaded the shareholders of the petitioner-company as was the anticipated consequence from accepting the shares of the Investment Corporation Ltd. in lieu of cash dividends, leaving thereby fullest opportunity to the directors of the managing agents of J. C. Mills Ltd. and the directors of the J. C. Mills to secure the majority of shares in Investment Corporation Ltd. on the face value of the shares, though those shares were secured at a higher premium by the petitioner-company. Thus a huge amount advanced by the petitioner-company by way of premium to the Investment Corporation Ltd. was utilised to give a direct benefit to a few in the management of the J. C. Mills Ltd. who were aware of the real value of the shares of the Investment Corporation Ltd. '

20. According to the respondents, in 1948 and 1949 the petitioner-company gave an option to its shareholders to accept, by way of dividend, cash or certain number of shares of the Pilarii company; but in the reports of the accounts for the years ending with 30th June, 1948, and 31st March, 1949, there was no full disclosure of the value of the shares of the Pilani company and the manner in which the option was given to the shareholders was itself calculated to dissuade them from accepting the shares of the Pilani company. The respondents further aver that:

' The composition of shareholders of J.C. Mills Ltd. on 31st March, 1948, was that out of 129 shareholders only 11 shareholders holding 1.03 lakhs of shares out of 3'09 lakhs of the shares belonged to Birla group. In 1957, in the petitioner-company out of 46,36,530 ordinary shares of the company of the face value of Rs. 10, 44,37,010 shares were held by Birlas.

(xi) Thus it will be seen that in the year 1948-49 the majority of shareholders were from non-Birla group. The shareholders belonging to Birla groupalone had the knowledge of actual facts because Birla Brothers (Gwalior) Ltd. was the managing agents of the petitioner-company. In 1958, Investment Corporation Ltd., which had become Pilani Investments Ltd., capitalised its premium and issued bonus shares. At the time the investment was made in the year 1948 only 33.3% of the capital of J.C. Mills Ltd. was in the hands of Birla group, whereas at the time of issue of bonus shares by Pilani Investments Ltd. 90.4% of the capital of the company was held by Birla group companies and directors. The result is that in 1948, while the petitioner which is a public company had paid a premium of as high as 900% without any justification, the benefit of it enured, as a result of such series of transactions to the Birla group. The moneys of the public company were, therefore, diverted for the benefit of a group which was in the control and the management of J.C. Mills Ltd. '

21. This circumstance was regarded by the Board as suggesting that the persons responsible for the management of the petitioner-company have been guilty of want of fair dealing, fraud, misfeasance and misconduct towards the company and its shareholders.

22. The other set of circumstances relied on by the Board relates to loans advanced by the petitioner-company to the Investments Ltd., a company incorporated on 9th June, 1948, at Gwalior with authorised capital of Rs. 1 crore and a paid up capital of Rs. 5 lakhs only and a subsidiary of the petitioner-company. It has been stated that in 1948-49 a loan of Rs. 2,13,83,694 was advanced by the petitioner-company to the Investments Ltd. at 2 per cent. per annum interest; a major amount of this loan was converted into 1,95,000 preference shares of Rs. 100 each which were purchased by the petitioner-company, thus reducing the loan amount to about Rs. 19 lakhs ; the preference shares originally carried a dividend of 1/4 per cent. and it was not until 1955 that the share-return was increased to 3 per cent. ; that besides the advance of Rs. 2 crores by way of investment in preference shares in Investments Ltd., substantial amounts were also given as loans to that company which were utilized by it for advance to companies in which the directors were interested. The respondents say that there could be no ' commercial justification ' for the loan of rupees two crores to Investments Ltd. and suggest:

' The purpose of the above mentioned transactions could reasonably be presumed to be for screening the utilisation of the company's funds, from the direct scrutiny of the shareholders by channelling all transactions in which the management was interested through the subsidiary. The funds placed at the disposal of Investments Ltd. were utilised for the benefit of the Birla group.'

23. In 1957, the Investments Ltd. was amalgamated with the petitioner-company pursuant to an order made by this court. The respondents say that this merger took place because in 1957, a substantial number of shares in the petitioner-company were held by the Birlas. On this point the averment of the respondents is contained in sub-paragraph (xiv) of paragraph 48 of the return which runs thus :

' Later, when the Birlas had acquired control over the shareholdings of J.C. Mills Ltd. by 1957, Investments Ltd. was amalgamated with J.C. Mills. Ltd. because there was no longer any necessity for the group in control to adopt this method. The composition of the shareholders of J.C. Mills Ltd. as on 21st May, 1948, discloses that out of 129 shareholders, only ll shareholders holding 1.03 lakhs of shares out of 3'09 lakhs of shares belonged to the Birla group. At the time of merger in 1957, out of 46,36,530 ordinary shares of the company of the face value of Rs. 10, 44,37,010 were held by Birlas. It, therefore, appears that the funds of the public company were channelled through another company for utilisation for the furtherance of the interest of the group in management and when that purpose was served the amalgamation took place. '

24. The third circumstance said to be justifying the making of the impugned order is about the powers exercised by Shri D.P. Mandelia and the remuneration paid to him and to his wife. The respondents say that Shri D.P. Mandelia, who has been designated as general secretary of the petitioner-company, exercises substantial powers of management within the meaning of Section 2(26) of the Companies Act; that he has received by way of remuneration an amount exceeding Rs. 30,000 per month from different companies including the petitioner-company and on one occasion Rs. 41,500 was paid for difference in fare for aircraft chartered for Shri P.P. Mandelia. In regard to Smt. Mandelia, the averment of the respondents is that though she has not received education ' beyond primary stage', she was paid Rs. 2,000 per month for ' looking after the lawns of the company 'and further that she was allowed to overdraw on her account with the petitioner-company Rs. 56,000 in November, 1959, ' when there was no sufficient credit balance in her account '.

25. The petitioner has filed a further statement replying to the statements made by the respondents in paragraph 48 of the return disclosing the circumstances on which, according to the respondents, the impugned order is based. The respondents have also filed a supplementary return ' for better appreciation of the facts'. These additional statements will be referred to later while dealing with the contentions advanced by Shri Sidharth Ray, learned counsel appearing for the petitioner, and the learned Attorney-General appearing for the respondents. The circumstances on which the board relied for making the impugned order were disclosed to the petitioner for the first time in the return filed by the respondents. That being so, in our opinion, the petitioner is entitled to file a further statement to show that those circumstances did not justify the making of the impugned order. The supplementary return filed by the respondents is in substance a reiteration of what has already been stated by them in paragraph 48 of the original return.

26. In developing his first and main submission that on the circumstances disclosed the Board could not have reasonably formed the opinion that they suggested that the persons in management of the affairs of the petitioner had in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or its members. Shri Ray, learned counsel appearing for the petitioner, referring to the first circumstance did not dispute that in 1948, the petitioner-company purchased 3,69,846 shares of the Pilani company at Rs. 100 each, that is at a premium of Rs. 90 per share and that in 1948 and 1949 an offer was made to the shareholders of the petitioner-company to accept by way of dividend certain number of shares of the Pilani company in lieu of cash dividend. He, however, submitted that the offer was to accept as dividend certain number of shares or cash and not one offering cash in the first instance and in the alternative shares of the Pilani company; that in respect of the dividend declared for the year ending on 30th June, 1948, out of the holders of 3,09,102 shares in the petitioner-company as on 29th September, 1949, when the dividend was declared, holders of only 380 shares opted for cash payment and, in respect of the dividend declared on 29th June, 1950, for the year ending on 31st March, 1949, out of the holders of 3,09,102 shares in the petitioner-company as on 29th June, 1950, holders of only 21 shares opted for cash payment; thus for the first period more than 99.8% and for the second period more than 99.9% of the petitioner's shareholders got the benefit of the shares of the Pilani company by way of dividend ; consequently, there was no room whatsoever for the suggestion that by not disclosing the real value of the shares in the two relevant account years the petitioner-company dissuaded its shareholders from accepting the shares of the Pilani company in lieu of cash dividend and thus gave the fullest opportunity to the managing agents and the directors of the petitioner-company to secure the majority of the shares of the Pilani company on the face value of the shares though they were secured at a premium by the petitioner-company. The very fact that holders of 99.8% and 99.9% of the petitioner's shareholders got the benefit of the shares of the Pilani company was, learned counsel asserted, a clear proof that all the shareholders were fully aware of the real value of the shares of the Pilani company and the presumption made by the respondents that in the two aforesaid years the petitioner deliberately did not disclose the true value of the shares was unwarranted. He added that during the intervening period of more than 18 years that preceded the passing of the impugned order not a single shareholder had alleged or suggested that he was in any way misled or deprived of benefit as was suggested by the respondents. Learned counsel proceeded to say that the respondents' statement that on 31st March, 1948, out of 129 shareholders of the petitioner-company only 11 shareholders belonged to the Birla group and held 1.03 lakh shares out of 3'09 lakh shares was misleading ; that the register of members of the petitioner-company clearly showed that there was no material change in the holding of the shares of the petitioner-company by the Birla group during the years 1948 to 1958 ; that the group remained in majority and its holdings were almost unchanged. It was said that several Birla companies were shareholders of the petitioner-company holding shares in their own names as well as in the names of their nominees; shares in the names of the nominees of the shareholder-companies were later re-transferred in the names of the shareholder-companies as was clear from the register of members of the petitioner-company. It was, therefore, submitted that the suggestion that the benefit of the premium amount paid by the petitioner company ultimately enured to the Birla group in 1958 when, out of the premium amount'received from the petitioner-company, the Pilani company issued bonus shares, was without any foundation.

27. Learned counsel further said that the respondents were not justified in assuming that the value of the Pilani shares purchased by the petitioner-company dwindled down to Rs. 57,00,000 from the mere fact that in the balance-sheet for the year ending on 31st March, 1949, the total investments of the petitioner-company were shown at Rs. 57,00,000 and that this was suggestive of fraud. It was said that in that balance-sheet the shares of the Pilani company held 'by the petitioner and recommended for distribution as dividend could not have been shown as the petitioner's holding and that it was apparent from the published balance-sheets and accounts for the years ending on 30th June, 1948, and 31st March, 1949, that the petitioner-com-pany's total assets which on 30th June, 1948, stood at Rs. 7,85,00,711-11-11 rose to Rs. 8,90,24,419-8-1 on 31st March, 1949 ; thus the petitioner's assets increased and did not decrease as alleged by the respondents and nothing was done by persons in the management of the petitioner-company to affect adversely in any way the interests of the petitioner or its shareholders.

28. Learned counsel urged that in treating the first alleged circumstance as suggestive of the things set out in Clause (b)(ii) of Section 237, the Board did not apply its mind to the real facts as they existed and altogether neglected to take into account the very relevant material, namely, the dividend register, the register of members of the petitioner-company for the relevant years and other documents. According to the learned counsel, prior to the passing of the impugned order, the respondent Nos. 7, 8 and 9 had obtained all information and inspected the dividend register and other documents of the petitioner and they had or should have had full knowledge of the facts and if the Board had applied its mind to the real facts and the relevant documents, it could not have, acting reasonably, come to the conclusion that it did.

29. In answer, the learned Attorney-General said that even if a very large and substantial majority of the shareholders of the petitioner-company accepted by way of dividend the shares of the Pilani company, the suggestion that by not disclosing the true value of the shares the petitioner-company dissuaded the remaining few shareholders, who did not take shares, from opting for the shares, would still remain ; the ' option letter ' which the shareholders had to use for claiming dividend showed that the shares were not distributed as dividend by the petitioner directly to the shareholders but were channelled through its managing agents or through some other persons including some employees ; and that as the power under Section 237(b)(ii) was exercised by the Government suo motu, it made no difference whether any shareholder did or did not complain. He added that there was no commercial justification for the payment of a high premium for the purpose of the shares of the Pilani company and that no reason had been assigned by the petitioner as to why the shares purchased for Rs. 100 each were offered to the shareholders equating them to cash of Rs. 10 per share. He maintained that at the time of the purchase of the shares in the Pilani company the shareholdings of the Birla group in the petitioner-company were only about one-third and that then the Pilani company distributed the premium by way of bonus shares. 90.4% of its holdings were held by the Birla group and thus it was the Birla group that gained to the extent of several crores at the expense of the non-Birla group.

30. In regard to the investments of the petitioner-company shown in the balance-sheet for the year ending on 31st March, 1949, at Rs. 57 lakhs, the argument of the learned Attorney-General was that as the shares were purchased in August, 1948, the amount of Rs. 3.71 crores invested in these shares should have been added to the amount of investment shown at Rs. 33.23 lakhs in the balance-sheet of the petitioner-company made up to 30th June, 1948, and the total amount should have been shown in the balance-sheet of the petitioner-company for the year ending on 31st March, 1949, and that even if the shares of the Pilani company distributed by the petitioner-company to its shareholders after 31st March, 1949, were excluded, still the value of the remaining shares of the Pilani company held by the petitioner on the cost basis would work out to about Rs. 1'9 crores whereas in the balance-sheet for the year ending on 31st March, 1949, the entire investment including the investment in the Pilani company had been shown by the petitioner at only Rs. 57 lakhs. According to the learned Attorney-General, the opinion formed by the board on this material could not be said to be unreasonable.

31. In our judgment, on the first circumstance relied on by the Board in making the impugned order no reasonable authority could have come to the conclusion that it was suggestive of fraud, misfeasance or misconduct towards the company or its members on the part of persons in the management of the affairs of the company. The substance of the alleged circumstance was not that the petitioner-company had purchased 3,69,846 shares of the Pilani company at Rs. 100 each at a premium of Rs. 90 per share, but it was that the shares were purchased at a premium, was not at all disclosed to the shareholders of the petitioner-company when an offer was made to them in 1948 and 1949 to accept by way of dividend the shares of the Pilani company or cash and further that if this fact had been revealed in the annual statements of accounts the majority of the shareholders of the petitioner-company would have exercised their option and taken the shares as dividend; that consequent to this ' concealment', an opportunity was given to the directors and the managing agents of the petitioner-company to secure the majority of the shares in the Pilani company at their face value and ultimately when the Pilani company capitalised its premium and issued bonus shares, the benefit was reaped by the Birla group. Now if, as is manifest from the dividend registers (annexure I to the further statement filed on behalf of the petitioner-company), 99.8% of the shareholders in one year and 99.9% of the shareholders in another year accepted the shares of the Pilani company by way of dividend, then the suggestion that the omission to state in the annual statements of accounts that the shares of the Pilani company had been purchased at a premium and their true value was deliberate and fraudulent just for the purpose of enabling the Birla group shareholders, who were in the know of the true value of the shares, to acquire the shares of the Piiani company, altogether falls to the ground. True, some of the shareholders accepted cash by way of dividend, but their number was insignificant as compared to the number of shareholders who accepted the Pilani shares as dividend. When the majority of the shareholders accepted the shares as dividend, the argument that those who accepted cash as dividend were dissuaded from accepting the shares by fraudulent non-disclosure of the true value of the shares or by the ' option letter ' which they had to use for claiming dividend wears rather thin and betrays an anxiety to see suggestions of the things set out in Clause (b)(ii) of Section 237 when none can be perceived on the face of it. It may be that those who accepted cash as dividend were in need of money or that they did not wantito take the risk of the shares, which were offered as dividend, rising or falling in value. It is not necessary to speculate on the reasons which might have persuaded a very few of the shareholders to accept cash as dividend. But the fact that more than 99% of the shareholders accepted the Pilani shares as dividend in each year and the remaining accepted cash as dividend does not really offer any justification for the suggestion that the non-disclosure of the true value of the shares in the annual statements of accounts was deliberately for the purpose of enabling the managing agents' and the directors of the petitioner-company to secure a majority of the shares in the Pilani company at their face value.

32. It is not without significance that no shareholder of the petitioner-company ever complained that it had been misled by the non-disclosure of the true value of the shares in the statements of accounts or dissuaded in other manner from taking the Pilani shares as dividend. No doubt, under Section 237(b) of the Act the Government may take the initiative swo moiu, but surely the Government does not under that Clause act on mere inspiration. Even for taking the initiative suo motu under Clause (b), the Government must have before it some complaint, application or representation of a person having a stake in the affairs of the company and its shareholding. That due weight must be attached to the fact that no shareholder ever complained becomes clear from the judgment of Bachawat J. in Rohtas Industries Ltd. case. In that case while dealing with circumstances suggesting fraud, etc., Bachawat J. said :

' Several things are to be noticed in this connection. No complaint with regard to the impropriety of the sale of the preference shares held by Rohtas Industries Ltd. was made to the Central Government by any of its creditors or members. '

33. Therefore, the fact that in the present case no shareholder ever complained cannot be ignored. It emasculates the suggestion of fraud made by the board.

34. The fact that more than 99% of the shareholders in each year accepted the shares as dividend would have become obvious to the Board if it had spen the dividend registers. According to the petitioner, the dividend registers were inspected by the respondents Nos. 7, 8 and 9. This has been denied. The fact remains that if the Board had seen the dividend registers, it could not have reasonably come to the conclusion that the distribution of shares of the Pilani company by way of dividend in the manner in which it was done was for benefiting the Birla group of shareholders. If, on the other hand, the dividend registers were not taken into account by the Board, then it neglected to consider very material and important documents which it ought to have taken into account. As observed by Hegde J. in Rohtas Industries Ltd. case 1 the standard required of the Board under Section 237(b) is that of an expert. As a body presumed to be an expert in company law matters, it should have taken into account the dividend registers, and if it had, then it could not have reasonably reached the conclusion stated in paragraph 48(ix) of the return.

35. Now, if over 99% of the shareholders accepted the Pilani shares as dividend, then the basis for the further suggestion that the benefit of investment made by the petitioner-company in purchasing the shares of the Pilani company, the distribution of the shares of the Pilani company by way of dividend and the bonus shares issued by the Pilani company subsequently went to the Birla group which was in the control and management of the petitioner-company also disappears. The benefit of the bonus shares would naturally go to the shareholders who accepted the Pilani shares as dividend and if those shareholders constituted over 99% of the shareholders and were of the Biria group, then naturally the benefit of the bonus shares would also go to that group of shareholders. If the suggestion of fraud in the distribution of the Pilani shares and dividend cannot be sustained, then it follows that a suggestion about fraud in the acquisition of bonus shares of the Pilani company by the Birla group cannot be made. The respondents' averment that in 1948 and 1949, the majority of the shareholders of the petitioner-company were from non-Birla group and at the time of the issue of bonus shares of the Pilani company the majority of the shares were held by the Birla group does not take into account the true position as revealed by the annual returns of shareholders filed by the petitioner-company with the Registrar of Companies, Gwalior, Madhya Pradesh. These returns were filed before us by the respondents pursuant to an oral direction given by us during the course of the hearing of the petition. In fact, in the supplementary return filed by the respondents, leave was sought by the respondents to rely on the annual returns of shareholders of the petitioner-company filed with the Registrar of Companies, Gwalior. Those statements show that the ll shareholders said to be holding 33'3% capital of the petitioner-company on 31st March, 1948, belonging to the Birla group and referred to in sub-paragraphs (x), (xi) and (xiv) of paragraph 48 of the return were these:

'1. Gwalior Commercial Co. Ltd. 5,000 shares

2. Central India Industries Ltd. 5,000 shares

3. B. M. Birla 100 shares

4. G. Prasad 100 shares

5. Punjab Produce & Trading Co. Ltd. 8,051 shares

6. Madho Praaad Birla 10,000 shares

7. Ujjain General Trading Society Ltd. 34,516 shares

8. Shrce Krishnarpan Charity Trust 14,080 shares

9. Raja Baldeodas Birla Santatikosh 25,000 shares

10. B. Kumar 101 shares

11. Birla Bros. Ltd., Gwalior Branch 25 shares.'

36. The Gwalior Commercial Co. Ltd. held in 1948,73,873 shares. On 29th September, 1949, it held 74,375 shares. In the years 1943 to 1948 this company no doubt held 5,000 shares, but the fact that in 1949 it came to possess substantially the same number of shares as it possessed in 1948,leads to the legitimate inference that during the intervening period the Gwalior Commercial Co. transferred the shares to its nominees and again acquired them back from them in 1949. The same is the position with regard to the Central India Industries Ltd., which held in 1942, 74,375 shares, 5,000 shares in the years 1943 to 1948, and again 74,375 shares on 29th September, 1949. There was no change in the holding of the Ujjain General Trading Society Ltd. which remained at 34,516 shares from 1945 to 1949. So also there was no change in the holdings of Raja Baldeodas Birla Santatikosh and Shree Krishriarpan Charity Trust in 1948 and 1949. The number of shares held by Madho Prasad Birla in 1948 was 10,000 ; in 1949 he held 9,800 shares. The Punjab Produce and Trading Co. Ltd. held 8,051 shares in 1948, but in 1949 it held 64,426 shares. It is not necessary to go into further details of the shareholdings ; but from the annual returns of the shareholders filed before us it is Clear that in 1948 and 1949 itself the majority of the shares were held by the Birla group. This explains the acceptance of the Pilani shares as dividends in those years by over 99% of the shareholders of the petitioner-company. The position about the shareholding in the petitioner-company would have become obvious to the Board on a perusal of the annual returns of shareholders; but, obviously, the Board did not take those returns into account while giving its version about the composition of shareholders. We hope we will not be thought disrespectful of the arguments of the learned Attorney-General about the composition of the shareholders when we say that it is to no purpose, when the suggestion of fraud in the distribution of the Pilani shares as dividend to the shareholders of the petitioner-company falls. It may be that a substantial shareholding of the petitioner-company and the Pilani company is with the Birla group; but Section 237 does not intend that the affairs of a company should be investigated when there is a concentration of shareholding in a particular group. Investigation under Section 237(b) can be ordered only if there are circumstances suggesting any of the inferences stated in the three sub-clauses of Clause (b).

37. The payment of a high premium by the petitioner-company for the purchase of the shares of the Pilani company might have had no commercial justification ; but that cannot, in view of the decision of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board, be regarded as a circumstance suggestive of the things spoken of by Section 237(b)(ii). The fact that the shares of the Pilani company purchased at Rs. 100 each were offered to the shareholders equating them to cash of Rs. 10 per share is irrelevant. It is well known that such offers of giving shares as dividends at par value even when the shares are of greater value are often made when one company is closely connected with another. This is often done in order that onecompany may have stake in another with the success of which its own interest is closely connected.

38. The statement of the respondents that in the balance-sheet of the year ending with 31st March, 1949, the written down value of the total investments was shown at Rs. 57,00,000 only and that the value of 3,69,846 shares of the Pilani company purchased by the petitioner for Rs, 3,69,84,600 could not have dwindled down to Rs. 57,00,000 within a span of six months does not seem to have any relevance to the matters specified in Section 237(b)(ii). The learned Attorney-General did not indicate how the total value of the investments shown in the balance-sheet for the year ending on 31st March, 1949, by itself or taken with the other statements made by the respondents in connection with the ' first circumstance ' was suggestive of fraud, misfeasance or misconduct on the part of persons in the management of the affairs of the petitioner towards the petitioner company or its members. Admittedly, the petitioner-company purchased 3,69,846 shares for Rs. 3,69,84,600 and these shares were distributed as dividend to the shareholders of the petitioner-company. It cannot, therefore, be said that the amount invested in the shares or the shares were appropriated by persons in the management of the affairs of the petitioner-company. If that had happened, it is inconceivable that the auditors would have certified the accounts of the petitioner-company for the year ending on 31st March, 1949. If the balance-sheet for the year ending on 31st March, 1949, did not make apparent the amount invested by the petitioner in these shares, then it would be at the most a criticism of faulty ' accounting ' and not a circumstance suggestive of fraud, misfeasance or misconduct.

39. In making the impugned order treating the first alleged circumstance as suggestive of the things set out in Clause (b)(ii) of Section 237, the Board did not at all apply its mind to the real facts as they existed and altogether neglected to take into account the very relevant material, namely, the dividend registers, the registers of members of the petitioner-company and other documents, for the relevant years. The learned Attorney-General did not dispute that there would be ' non-application of mind ' if the Board had not considered certain relevant material which would have ' tilted the balance ' if it had been taken into account. As we have endeavoured to point out earlier, if the Board had taken into account the dividend registers and the registers of members of the petitioner-company, it could not have, acting reasonably, come to the conclusion of any suggestion of fraud, misfeasance or misconduct, in the purchase of the Pilani shares or in their distribution as dividend or in the manner in which the benefit of bonus shares issued by the Pilani company was passed.

40. On the second circumstance, namely, the advance by the petitioner-company of Rs, 2,13,83,694 to the Investments Ltd. at 2 per cent. perannum interest, learned counsel for the petitioner submitted that the Investments Ltd. was a subsidiary of the petitioner-company; the rate of 2 per cent, interest was regarded by the petitioner as very reasonable in view of the fact that it did not attract income-tax in the former Gwalior State; the petitioner regarded investment of a part of the loan amount in preference shares of the Investments Ltd. as a good and sound investment. It was not disputed that the Investments Ltd. gave moneys to other companies out of the advances it had received from the petitioner-company. But it was said that there was nothing illegal about the investments of the Investments Ltd. in companies in which the directors were interested as the investments were safe, secure and gave a good return.

41. Learned counsel referred us to sub-paragraph (viii) of paragraph 14 of the further statement filed by the petitioner-company, and urged that the details of loans advanced by the Investments Ltd. to other companies and of the interest received on loans given therein would show that return on the loans given by the Investments Ltd. was more than 50% higher than on investments made in Government securities and that the rate of interest on the loans and the rate of dividend on the preference shares in actual fact did not affect the interests of the petitioner-company or its shareholders in any way. He refuted the suggestion made by the respondents in sub-paragraph (xiii) of paragraph 48 of the return that the purpose of the loan transactions by the petitioner-company to the Investments Ltd. could be ' presumed ' to be for screening the utilisation of the company's funds from the direct scrutiny of the shareholders, by contending that the investment in cumulative shares of the Investments Ltd. by the petitioner-company was mentioned in the annual statements of accounts and the balance-sheets of the petitioner for the relevant years to which were also attached the profit and loss accounts and balance-sheets of the Investments Ltd. specifying the rate of dividend on preference shares: that those accounts were unanimously passed by the shareholders and were also filed with the Registrar of Companies.

42. In regard to the respondents' statement in sub-para graph (xiv) of paragraph 48 of the return that the sums of the petitioner-company were, through the medium of the Investments Ltd., utilized for the furtherance of the interest of the Birla group in the management of the petitioner-company and that when that purpose was served the Investments Ltd, was amalgamated with the petitioner-company, learned counsel said that this was an unwarranted assumption. He referred us to the register of shareholders filed with the Registrar of Companies and to annexure IV to the further statement of the petitioner and said that there was no material change in the holding of the shares of the petitioner-company by the Birla group during the years 1948 to 1959 ; that a large majority of the shareholdersof the Investments Ltd. were either the petitioner or the petitioner's shareholders and thus no loss whatsoever occurred to the petitioner-company by the loan transactions or by the amalgamation of the Investments Ltd. with the petitioner-company ; that the powers exercised by the directors and officers of the Investments Ltd. were all intra vires and authorised by law and that in any event the management of the affairs of the Investments Ltd. could not be made the basis of an order of investigation of the affairs of the petitioner-company. Learned counsel emphasized that the second circumstance did not at all suggest any of the things specified in Section 237(b)(ii) and that even if the transactions effected by the petitioner-company with its subsidiary, the Investments Ltd., were regarded as not sound on grounds of commercial expediency, that could not constitute a valid ground for the making of an order under Section 237(b).

43. The learned Attorney-General in reply said that the second circumstance was one suggesting not fraud but misconduct on the part of persons in the management of the affairs of the petitioner-company leading to pecuniary loss to the company by misapplication of its assets. He said that the amount which the petitioner-company earned by way of 2 per cent. interest on the loan amount of Rs. 2,13,83,694 was reduced to 1/4 per cent. when a substantial portion of the loan amount was converted into preference shares and it was only several years later in 1955 that the return on preference shares was increased to 3 per cent. He sought to emphasize that the funds of the petitioner-company had been utilised for the benefit of the Birla group of companies in which the directors of the Investments Ltd. were interested and that the funds were placed at the disposal of the Investments Ltd. for their utilisation for the benefit of the Birla group.

44. On the argument of the learned Attorney-General the question arising for consideration on the alleged second circumstance is whether that circumstance could be treated as suggestive of misfeasanee and/or misconduct. It is to be observed and emphasized that the Investments Ltd. was a subsidiary of the petitioner-company. This was not disputed before us by the respondents. Now, it is well known that subsidiary companies are subservient to the main company and are formed by or with the help of the main company for promoting its business. The main or the holding company very often takes up the majority of the shares of the subsidiary company and obtains a control over the management of the subsidiary company. The main company has thus a stake in the subsidiary company and its own interest is closely connected with the success of the subsidiary. If this relationship between the petitioner-company and the Investments Ltd. is borne in mind, then there was nothing odd or illegal in the transaction of an advance of Rs. 2,13,83,694 as loan by the petitioner to the InvestmentsLtd. at 2 per cent. interest and in the investment of a part of the loan amount by the petitioner-company in preference shares of the Investments Ltd. These transactions cannot in any sense be regarded as misapplication of the funds of the petitioner-company. The contention that the rate of 2 per cent. interest was not high and that even this interest earning was reduced to per cent. when a substantial portion of the loan amount was converted into preference shares may have a bearing only on the business or commercial expediency of the transaction. Even if, for that reason, the loan transaction and the investment in preference shares were to be regarded as not justified by business or commercial expediency, they cannot be treated as suggestive of misconduct or misfeasance on the part of persons in the management of the petitioner-company. This is clear from the decision of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board. The business of the Investments Ltd. was to invest its moneys. It was, therefore, natural that it gave loan amounts to other companies. In fact, as pointed out by learned counsel for the petitioner, the Investments Ltd. got a good return from the loans advanced by it to other companies and the benefit of this ultimately went to the petitioner-company and its shareholders as a large majority of the shareholders of the Investments Ltd. were either the petitioner or the petitioner's shareholders.

45. The suggestion that by transactions effected with the subsidiary, the Investments Ltd., the petitioner-company desired to screen the utilization of its funds from the direct scrutiny of its shareholders cannot be sustained in view of the fact that the investment made by the petitioner-company in the Investments Ltd. found a mention in its annual statements of accounts and the balance-sheets and the profit and loss accounts and the balance-sheets of the subsidiary, the Investments Ltd., were attached to the balance-sheets of the holding company, namely, the petitioner-company, as required by Section 212 of the Act. What we have said earlier in connection with the first circumstance about the composition of shareholders of the petitioner-company during the years 1948 to 1959 shows the untenability of the further suggestion that the funds of the petitioner-company were utilised for furtherance of the interest of the Birla group in the management of the petitioner-company and that when that purpose was served the Investments Ltd. was amalgamated with the petitioner-company. During the years 1948 to 1959, the majority of the shares of the petitioner-company were held by the Birla group; that being so, there can be no basis for suggesting that the loan advances were made by the petitioner-company to the Investments Ltd. when the majority of its shareholders were of ' non-Birla group ' and that these funds were utilized for the benefit of the Birlagroup of companies in which the directors of the Investments Ltd. were interested.

46. It must be noted that there is no suggestion of fraud or dishonesty in the investments under consideration. Therefore, even if it be assumed that the second circumstance was suggestive of misfeasance and/or misconduct, the impugned order being an integral and indivisible order cannot be sustained. In this connection it would be pertinent to refer to the observations of Shelat J. in Barium Chemicals Ltd. case. He said :

' As regards misfeasance or misconduct, it is not suggested in any of the affidavits, though the Board had before it the memoranda of the four directors, that the circumstances set out in paragraph 14 of the Chairman's affidavit had arisen as a result of any fraud or dishonesty on the part of the second appellant or that it was his act which had caused pecuniary losses to the company. Mere bungling or faulty planning cannot constitute either misfeasance or misconduct. But assuming that these circumstances were to be treated as suggestive of misfeasance and/or misconduct, the impugned order is an integral and indivisible order and the investigation ordered thereunder is not and by the very nature of it cannot be confined to finding out only misfeasance and/or misconduct. In this view, the order must be held as being beyond the scope of Clause (b) and cannot be sustained.'

47. In the case of Barium Chemicals Ltd. , the impugned order, inter alia, recited ;

'... and further that the persons concerned in the management of the affairs of the company have in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company and its members. '

48. In the case before us also the impugned order says :

' ... the persons concerned in the management of the affairs of Messrs Jiyajeerao Cotton Mills Ltd. ... have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company and its members. '

49. A body expert in company law matters, like the Company Law Board, could not have reasonably made the order under challenge on the basis of the second set of circumstances.

50. The third set of circumstances, according to the learned counsel for the petitioner, was wholly extraneous to Section 237(b)(ii). Learned counsel referred us to paragraph 16 of the further statement of the petitioner and argued that the allegation that Shri Mandelia received by way of remuneration more than Rs. 30,000 per month from different companies including the petitioner company was totally false; he was paid a salary of Rs. 6,200 per month besides Rs. 625 as entertainment allowance by the petitioner and the total remuneration received by him from different companies includingthe petitioner-company at no time exceeded Rs. 17,826 per month inclusive of entertainment and conveyance allowance. It was said that the records of the income-tax department relating, to Shri Mandelia's assessment could have revealed this fact to the Company Law Board. He proceeded to urge that Shri Mandelia was the adviser of the petitioner and was connected with the petitioner-company in one capacity or the other since 1931 and that at no time he was a director or manager of the company and never exercised any powers of management within the meaning of Section 2(26) of the Companies Act, and his employment by the petitioner was not in contravention of any law. In regard to the alleged payment of Rs. 41,500 to Shri Mandelia for the aircraft said to have been chartered by him, it was submitted that in December, 1962, the petitioner-company paid Rs. 41,501.84 to Bharat Commerce and Industries Ltd., being the amount payable by it on account of deficit in aircraft expenditure account calculated as per charter agreement for a period of five months from 1st August, 1962, to 31st December, 1962, and that the payment had nothing to do with Shri Mandelia, The allegations against Smt. Mandelia were said to be ' false, mischievous and frivolous '. It was denied that she was paid Rs. 2,000 per month for looking after the lawns of the company and said that the payment to her was made because she was social welfare officer of the petitioner-company and ' safe custody-in-charge '. It was also added that she never drew or overdrew a sum of Rs. 36,000. Learned counsel contended that the Company Law Board admittedly relied on the third set of circumstances in making the impugned order and, as those circumstances were wholly irrelevant, the impugned order could not be sustained.

51. The argument in reply of the learned . Attorney-General was that Shri Mandelia was virtually occupying the position of manager or managing director, by whatever name he was called, and that his appointment was in contravention of Sections 197A and 269 of the Act. Before us he did not stress the allegations made in the return about payments to Shri Mandelia and his wife. He also did not dispute the proposition that an administrative or quasi-judicial order based on several grounds, all taken together, cannot be sustained if it be found that some of the grounds arc non-existent or irrelevant and there is nothing to show that the authority would have passed the order on the basis of the other relevant and existing grounds. The learned Attorney-General, however, contended that even if the allegations made about Shri Mandelia and his wife were regarded as circumstances on which the impugned order was passed and even if they were irrelevant, still the impugned order could not be struck down as in the present case it was clear that the Company Law Board would have passed the order on the basis of the other two sets of circumstances which were relevant. In thisconnection he referred to the decision of the Supreme Court in State of Maharashtra v. B.K. Takkamore, A.I.R. 1967 S.C. 1353 .

52. In our judgment, the third set of circumstances disclosed in the return of the respondents is non-existent and irrelevant. It is difficult to comprehend how those circumstances are even remotely suggestive of the matters specified in Section 237(b)(ii). Even if it be assumed that Shri Mandelia was virtually occupying the position of manager or managing director of the petitioner-company and his appointment was contrary to Sections 197A and 269 of Act, that cannot advance the matter any further. The appointment, even if contrary to the aforesaid provisions of the Act, is in no sense suggestive of fraud, misfeasance or misconduct as explained in the judgment of Shelat J. in Barium Chemicals Ltd. v. Company Law Board. The circumstances comprised in the third set were, therefore, wholly extraneous. That the Company Law Board was influenced by these extraneous circumstances is clear from the return filed by the respondents wherein the circumstances in justification of the impugned order were disclosed. Neither the impugned order nor the statements contained in the return show that the other two sets of circumstances were the sole or dominant circumstances persuading the Company Law Board in making the impugned order.

53. There is a distinction between the case of State of Maharashtra v. B.K. Takkamore and the present case. In the case of State of Maharashtra v. B.K. Takkamore one of the grounds on which an order superseding the Municipal Corporation of the City of Nagpur was passed was found to be irrelevant and non-existent. The question, therefore, arose in the Supreme Court whether the order of supersession was invalid. The Supreme Court referred to some decisions and then stated :

' An administrative or quasi-judicial order based on several grounds, all taken together, cannot be sustained if it be found that some of the grounds are non-existent or irrelevant, and there is nothing to show that the authority would have passed the order on the basis of the other relevant and existing grounds. On the other hand, an order based on several grounds some of which are found to be non-existent or irrelevant, can be sustained if the court is satisfied that the authority would have passed the order on the basis of the other relevant and existing grounds, and the exclusion of the irrelevant or non-existent grounds could not have affected the ultimate opinion or decision. '

54. Paragraph 3 of the show-cause notice issued in the case of State of Maharashtra v. B.K. Takkamore stated :

' And whereas the grounds aforesaid jointly as well as severally appear serious enough to warrant action under Section 408(1) of the said Act. '

55. The Supreme Court referred to this paragraph and then proceeded to say :

'The order dated September 29, 1965, read with the notice dated July 21, 1965, shows that in the opinion of the State Government the second ground above was serious enough to warrant action under Section 408(1) and was sufficient to establish that the corporation was not competent to perform its duties under the Act. The fact that the first ground mentioned in the order is now found not to exist and is irrelevant, does not affect the order. We are reasonably certain that the State Government would have passed the order on the basis of the second ground alone.'

56. Here, as already stated, there is nothing to show that the Company Law Board would have passed the impugned order on the basis of the other two sets of circumstances alone. The impugned order thus being based on matters extraneous to Section 237(b)(ii) of the Act cannot be sustained.

57. In our judgment, the circumstances disclosed by the Company Law Board for making the impugned order in no way suggest that the persons concerned in the management of the affairs of the petitioner-company have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or its members. No reasonable person or authority, much less an expert body like the Company Law Board, could have reasonably formed the opinion that those circumstances were so suggestive. The board did not apply its mind to the material before it and totally failed to take into account the very relevant material, namely, the dividend registers and the annual returns of shareholders, and if this material had been taken into consideration, then the Board could not have reasonably formed the opinion that it did. Again, in making the impugned order, the Board was influenced by matters extraneous to Section 237(b)(ii), namely, those referred to while dealing with the third set of circumstances. It cannot, therefore, be held that the opinion formed by the Board in this case is in accordance with Section 237(b)(ii). The impugned order cannot be sustained and must be set aside.

58. Learned counsel for the petitioner also raised before us several other contentions. They were, namely, first, that the manner of investigation was not specified in the impugned order; secondly, the investigation was not limited to Section 237(b)(ii) but was made inclusive, inter alia, of contravention of any other law for the time being in force ; thirdly, the investigation was directed to embrace the period prior to the passing of the Companies Act; fourthly, under Section 237(b)(ii) the investigation could only be in relation to the acts of the present management towards the present members; fifthly, Section 10E did not authorise delegation by the Union of India of its right to form an opinion to the Company Law Board or to any other persons; inany event, formation of an opinion by the Central Government under Section 237(b)(ii) was not a matter which could be delegated at all and Section 10E was ultra vires inasmuch as it suffered from the vice of unauthorised and excessive delegation of power; sixthly, Notification No. G.S.R, 72, dated 1st January, 1966, mentioned in the impugned order was ultra vires and illegal; and, seventhly, Section 237(b)(ii) of the Act offended article 14 of the Constitution. The view we have expressed on the main submission advanced on behalf of the petitioner strictly renders it unnecessary for us to deal with these contentions. But if it be necessary for us to deal with those contentions, it would be sufficient to say that the contention about delegation of formation of opinion, of the vires of Section 10E and of the Notification No. G.S.R. 72, dated 1st January, 1966, and of the constitutionality of Section 237(b)(ii) cannot be accepted in view of the decision of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board on these points. Having regard to the language of Section 237(b)(ii) the other contentions also cannot be accepted. Investigation under Section 237(b)(ii) is about the affairs of a company and not into the circumstances suggesting the matters specified in Clause (b)(ii). The expression ' the affairs of the company ' is wide enough to include contravention of any law for the time being in force and there is no justification in the language of Section 237(b)(ii) for reading into that provision any limitation as regards the period of affairs to be investigated or as regards the persons in the management of the affairs of the company or as regards the members of the company. Again, under Section 237(b)(ii) read with Clause (a), it is not obligatory on the part of the Government to prescribe the manner in which the report by the Inspector is to be made.

59. For the foregoing reasons, this petition is allowed and the order made by the Company Law Board on 7th December, 1967, under Section 237(b) directing an investigation into the affairs of the petitioner-company is quashed. The respondents are restrained from giving effect in any manner to the impugned order dated 7th December, 1967. The petitioner shall have costs of this application. Counsel's fee is fixed at Rs. 500. The outstanding amount of the security deposit shall be refunded to the petitioner.


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