Skip to content


S.L. Verma Vs. the Delhi Flour Mills Company Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCompany Petition No. 71 of 1972
Judge
Reported in[1975]45CompCas33(Delhi); 11(1975)DLT226
ActsCompanies Act, 1956 - Sections 237; Companies Court Rules, 1959 - Rule 11
AppellantS.L. Verma
RespondentThe Delhi Flour Mills Company Ltd. and ors.
Advocates: Satish Chander,; Ved Vyas,; A.N. Khanna and;
Cases ReferredM. Bajoria v. Union of India
Excerpt:
.....proceedings pertaining to the company were pending before the court - the contention that only the central government could order an investigation was found to be untenable - under the provision, the court was required to issue necessary directions to the central government for appointment of an inspector for investigating the affairs of the company, if it was found to be necessary from the facts and circumstances of the case - - notice of this petition was given to the first five respondents as well as the registrar of companies. the first portion, commencing from para 8.1, deals with the profits made by the company in four separate financial years ending 31st october, 1966, 31st october, 1967; 31st october 1968; and 31st october, 1969. the figures for purchase and sales disclosed by..........for an order by the court directing that the affairs of the said company, m/s. delhi flour mills company limited, be investigated by an inspector appointed by the central government. five other persons have been joined as repondents to the petition. they are the managing director of the company, two other directors of the company. shri r. p. jain (chief executive of the company) and the secretary of the company law board. notice of this petition was given to the first five respondents as well as the registrar of companies. later, notice was also given to the central government on whose behalf shri h. s. bhatia, assistant registrar of companies, appeared. he also appeared on behalf of the registrar of companies. shri h.s. bhatia stayed that the central government was not making any.....
Judgment:

D.K. Kapur, J.

(1) This is a petition under Section 237 of the Companies Act, 1956, (hereinafter called the Act) instituted by a shareholder of M/s Delhi Flour Mills Company Limited, which prays for an order by the Court directing that the affairs of the said company, M/s. Delhi Flour Mills Company Limited, be investigated by an Inspector appointed by the Central Government. Five other persons have been joined as repondents to the petition. They are the Managing Director of the company, two other Directors of the company. Shri R. P. Jain (Chief Executive of the Company) and the Secretary of the Company law Board. Notice of this petition was given to the first five respondents as well as the Registrar of Companies. Later, notice was also given to the Central Government on whose behalf Shri H. S. Bhatia, Assistant Registrar of Companies, appeared. He also appeared on behalf of the Registrar of Companies. Shri H.S. Bhatia stayed that the Central Government was not making any representation in respect of this petition. The Registrar of Companies filed a reply in the form of an affidavit. A reply was also filed by the company in the form of an affidavit and a further affidavit was filed by the petitioner.

(2) Subsequently, an application, C. A. 5 of 1974, was moved by the first respondent (Delhi Flour Mills Co. Ltd.). in which it was urged that the petition was entirely misconceived and was not maintainable, inter alia, for the reason that the Central Government alone could direct investigation and Section 217(a)(ii) of the Companies.Act, 1956, was not available to a private party for the purpose of getting the affairs of a company investigated by an Inspector appointed by the Central Government, except if there were other proceedings pending before the Court such as proceedings under Section 397 and 398 of the Act. It was urged that the Court had no jurisdiction to make an order directing the investigation of the affairs of the company as this jurisdiction was. exclusively reserved to the Central Government. In this petition, it was submitted that the preliminary point should be decided in the first instance Notice of this application was given to the patitioner and I directed that this question should be determined as a preliminary matter. On bearing this question, I came to the conclusion that the question of maintainability should not be restricted only to the point whether the petitioner could move the Court and obtain an order, but it should also be considered as to whether the Court could act on the application of the petitioner as framed in the present case. With a view to determining the question of maintainability, I have gone through the pleadings of the petition as app'aring in the 'petition and have tried to determine whether on the material placed before the Court in the petition itself the Court was entitled to order an investigation into the affairs of the first respondent. I may mention straight way. that Mr. Satish Chandra, learned counsel for the petitioner, did state that he had further material which would support an investigation in the affairs of the first respondent. But, I did not permit this to be placed on record in the form of a further affidavit or a replication. I was of the view that the Court had to consider on the material in the petition, whether the petition was maintainable as such.

(3) I first deal with the question raised specifically in C.A. No. 5 of 1974 as to whether the petition praying for the investigation of the affairs of a company can be moved as an original petition in the Court. In this respect, learned counsel for the petitioner cited Deodatt Purshotta Patel v. Alembic Glass Industries Limited, wherein it was held that there was nothing in the language of Section 237 to show that the jurisdiction conferred by that Section could only be exercised in respect of a company when some other proceedings were pending in the Court. I fully agree with this decision and I see no reason why the petition praying for an investigation should not befiled even though no other proceedings are pending. It is another matter that the Court may be very cautious in ordering investigation, if such a petition is moved, but the jurisdiction of the Court seems to be preserved by Section 237(a)(ii) of the Act. Moreover, the Company (Court) Rules, 1959, also indicate that such a petition is maintainable. In Rule 11, the proceedings, which may be moved by applications to the Company Court, have been divided into two categories, some of which are to be instituted on petition, and some of which have to be commenced by Judge's summons. There is a list of 23 applications, which are to be instituted on petitions. These petitions are to be tried in a different manner from Judge's summons. In the list of 23 applications, the 9th entry is :-'applications under Section 237 for ani order that the affairs of a company are to be investigated ' Thus, it appears that applications for the investigation of the affairs of a company can be instituted by themselves as original petitions in the Court and it is so contemplated by the Company (Court) Rules Mr. Satish Chandra, learned counsel for the petitioner. has contended that such petition must be tried fully before an order is given as to whether investigation should be ordered or not. I do not want to express any opinion on this question at this stage. It appears to me that the every objcct of moving a petition under Section 237 of the Act to the Court is to order an investigation by an Inspector to be appointed by the Central Government. This decision requires no previous investigation by the Court. However. I am prepared to say, that there, might be a case before the Court when an investigation of a preliminary character may be necessary by the Court before the petition is adjudicated upon.

(4) I am at the present moment, concerned with the other-question which arises in this case conceraing the applicability of Section 237 of the Act. I have to determine whether the present case is one which could be ordered to be investigated by the Central Government through an Inspector. For this purpose, I will shortly state what is set out in the petition. Before I do so, I may also state that the nature of an investigation to be ordered depends very much on the power of the. Central Government which would be exercised if the Court so orders. For instance, the consquences of an order directing investigation have to be seen from the various provisions which govern such questions. Section 235, 236 and 237 of the Act only state the manner in which the investigation is to be commenced. But, 'once the investigation is ordered, then the subsequent provisions of the Act come into operation. Section 237 of the Act sets out the powers of the Inspector to make an investigation and Section 240 and 240(a) of the Act deal with various matters which have to be dealt with by the Inspector and provide for examination of the books and seizure of the documents etc. Section 241 of the Act deals with the report of the Inspector and Sections 242, 243 and 244 of the Act deal with what is to bedone once a report has been made. Under Section 242, of the Act. a prosecution can be instituted. Under Section 244 of the Act. proceedings for recovery of damages or property can be instituted. Now, the result of an investigation, to my mind, can result in other prosecutions of an application for winding up or an application under Section 397 and 398 of the Act or a suit for recovery of damages or any property, which has been misapplied on account of mis-teasance or mis-management. thereforee, before an investigation can be ordered by the Court, there seems to be some sort of material required, which would result inproceedings been taken of the manner prescribed by Sections 242, 243 or 244 of the Act. It is unnecessary to order an investigation merely because a shareholder feels aggrieved at the manner in which the company's business is going on. It is in this light that I propose to analyze the allegations contained in the petition.

(5) The substance of petition can be divided into three portions. The first portion, commencing from para 8.1, deals with the profits made by the company in four separate financial years ending 31st October, 1966, 31st October, 1967; 31st October 1968; and 31st October, 1969. The figures for purchase and sales disclosed by the company are set out as well as net-profits. According to the petition, the net-profits had fallen from Rs 13 lakhs in 1966 to only Rs. 1.74 lakhs in 1969, which showed mis-management and mis-conduct on behalf of the respondents. The petitioner stated that it should be discovered as to where the profits had been eaten up and the responsibility should be fixed for the same I need hardly say that the profitability of a company varies from year to year and depens on such things as price, cost of labour, cost of electricity and other factors which vary from year to year I do not think that the purpose of Section 237 of the Act is to order an investigation into the economic working of a company. On the other hand, the purpose of such aninvestigation is to see whether allegations con-cerning mis-management, mis-appropriation or other illegal acts are justified. I do not think that that this allegation (in this petition) can be considered as one which can be directed to be investigated by an Inspector appointed by the Central Government. If, on the other hand, there is some material to show that the fall of profits is due to illegal acts, then an investigation may be ordered in a suitable case. I, thereforee, reject this ground as being sufficient to order an investigation.

(6) The next ground or portion set out in paragraph 8.3 is that certain persons have been appointed Senior Executives and have been paid huge salaries. The persons are named in the paragraphs. The persons mentioned are stated to be near relations of respondents 2 and 5, i.e., the Managing Director and the Chief Execuutive of the company. In fact, one of the person's name is the Chief Executive himself. I think no investigation is necessary for the purpose of determining the salaries of the persons employed by the company. There are sufficient number of provisions of the Act guarding the shareholders from unauthorised appointments of employees, who are relatives of Directors. If there has been any breach of those provisions of the Act, the petitioner should seek his remedy elsewhere. This is also not a matter which, in my opinion, requires investigation by an Inspector.

(7) I nov come to the third portion of the petition, which is concerned with the fact that the respondent company is a holding company of Indian Hardware Industries Limited. It is stated in the petition that Indian Hardware Industries Limited is' a company registered in the Union Territory of Delhi in which Delhi Flour Mills,Company Limited helds shares worth Rs. 4,15,879.25 paise and has also advanced a loan of Rs. 28,66, .83.19 paise to that company. It is stated that for the year ending 31st October, 1966. the Directors have foregone interest on the loan whereas in the loans and advances entered in the balance' sheet it is stated that the matter of interest has been deferred till an amalgamation has taken place between the first respondent and Indian Hardware Industries Limited; and in the subsequent balance sheets, it is stated that there was no provision for the interest on the loan advanced to the subsidiary company. It is claimed that the total amount recoverable from the subsidiary company (Indian Hardware Industries Limited) totalled to about Rs. 47 lakhs as on 31st August, 1972. In the next paragraph of the petition, paragraph 8.7. it is claimed that the investment by the Delhi Flour Mills Co. Ltd (hereinafter called the 'holding company') in the shares of the subsidiary company and the advance of the loan to the sama company suggest serious misconduct and certain grounds are given as to why this is so I may now deal with these grounds.

(8) It is firstly stated that large borrowings had been made by the holding company in the from of deposits and debentures from the open market for the purpose of making investments in the subsidiary company and high imerest had been paid on those loans. The figures for 1966, 1967, 1968 and 1969 are given and show that the debentures and deposits varied bet.veenRs.221akhsandRs.29 lakhs approximately in these four years. The next ground was that the Directors of the first respondent were behaving as despotic owners by investing about seven times the paid up capital of the holding company in the subsidiary company without earning interest, much less dividend and this was detrimental to the shareholders of the holding company, the first respondent. The third point made is that the shareholders of the subsidiary company are mainly relations and employees of the Directors of the holding company and, thus, the advances were made to that company for benefiting their own family members at the expense of the minority shareholders of the first respondent the holding company.

(9) Although the allegations made in the petition show that a considerable investment lias been made by the holding company in the subsidiary company, which has not so far matured in any profits and is in fact causing a loss to the holding company ; I do not think that this is a matter which can be treated as an illegality under the Act. It is open, under the provisions of the Act, for one company to own a considerable portion of 'the shareholding of a subsidiary company. This is just as any private individual may make an investment in a company It is an unfortunate matter that the subsidiary company has not shown the requisite profitability that would justify such a large investment. However, in order to justify' an investigation in this matter, it would have to be shown that the amount had been misappropriated in some way or there had been some mis-feasance or some other illegality. To put it another way, there may be a case where a company makes a large investment, which results in a loss,- but the loss is bona fide. There may be another case in which a lagre investment is made with the object of transferring assets dishonestly to some other person. There is not even an allegation in the petition that the investment in the subsidiary company has been made for the pur ose of passing on the assets of the holding company income dishonest or illegal manner to the subsidiary company or to some other persons connected with the subsidiary company. The only facts disclosed, in the petition raise a question-that the holding company, i.e., the first respondent has made a large investment in a subsidiary company, which does not appear to have fructified so far into a profitable venture. It is quite possible that in the years to come, the subsidiary company may start, doing well. It is not possible on the material in the petition to say that any facts are disclosed, which would justify an investigation. After all, what has the Inspector to investigate? Is he to merely ascertain that large sums of money ate investigated This is a known fact. It is patent from the balance sheets of the holding company which has also included the balance sheets of the subsidiary company. Along with the petition, the petitiner has filed the accounts 'of the Delhi Flour Mills Company Limited for the years 1966, 1967, 1968 and 1969. These are Annexures C/l toC/4. Each one of these printed books also set out the balance sheets of Indian Hardware Industries Limited for the corresponding periods. For instance, in the balance sheet of Delhi Flour Mills Company limited for the year ending 31st October, 1966, the balance sheet of M/s Indian Hardware Industries limited as on 30th June, 1966 is enclosed. From the balance sheet of Indian Hardware Industries Limited ending on 30th June, 1969,1 find that there was a carry forward loss of Rs. 1,^9,833.87 paise which was reduced to Rs. 89,446.72 parse. The balance sheet for the period.ending 30th June, 1966, showed a carry forward loss of Rs. 3,?8,508.54 paise. This shows that Indian Hardware industries Limited had a loss of about Rs. 3.50 lakhs prior to 1966, which was reduced to about Rs. 89,000.00 in 1969. Naturally, a new industry does not make profits immediately. There is, thereforee some justification for the petitioner 'to say that the Directors of the first respondent have not made a profitable venture and have not been wise in making as investment in the subsidiary company. But, lack of wisdom is not something that can he investigated under Section 237 of the Act. What is required to be investigated is some mal-practice. It is the absence of the allegations regarding, such malpractices that is fatal to the petitioner's case. I see no object in the Court ordering an investigation into something which is is really apparent from reading the balance sheets annexed to the present petition. I, thereforee, say that on the pres.ent material this is not a sufficient ground for ordering investigation of the affairs of the first respondent.

(10) There is a subsidiary question raised in the petition in paragraph 8.9. This states that a sum of Rs. 6,57,275 48 paise has been advanced to Delhi Flour Mills Syndicate, the sole selling agents, who are not doing any work for the first respondent and, there fore, this is not justified. I need hardly say that this is an insufficient matter for investigation, because this is aknown fact Even if this allegation is true, it is something concerning which the petitioner can get relief by moving the appropriate court. I see no reason why this matter requires investigation by an Inspector appointed by the Central Government.

(11) To my mind, the object of investigation is quite different from the one which has impelled the petitioner to move this petition. The purpose of investigation is to discover something which is net apparently visible to the naked eye. If, for instance, the petitioner had brought out some mal practice in the working of the first respondent which would raise an inference of dishonesty or mal-feasance or mis-feasance or mis-appropriation or some such similar ground which would lead to an inference of mismanaeeroent or oppression etc., then the Court_might consider making an order for investigation. Even in such a case, it might be that the petitioner had a sufficient remedy by applying for a winding up order or by applying under Section 397 and 398 of the Act. The whole question would depend on the circumstances disclosed in the petition.

(12) One serious misgiving has .been in my mind concerning the present petition which I may now set but. It is open to any petitioner to move the Court for an order of investigation against the company. He need not be a shareholder, he need not have any personal interest he may be a complete stranger and yet he can move the Court seeking an order for investigation of the affairs of a company. If the court has to-deal with all such petitions, the Court may be. literally flooded wisth them. It is, thereforee, necessary for the Cort to act most cautiously in the question of considering whether the 'affairs of a company need investigation. It is for this purpose and this reason that I have considered this point from the point of viaw of maintainability rather than en the material that might be found iF an investigation was actually ordered. It is quite possible that if a particular company is invastigated some other facts may arise or be discovered. Suh' facts might justfy aninvestigation. On such an argument, the affairs of all companies could be investigated throughout the Country. In ordar to prevent such an unusual situation arising, I think that the Court has to act with the greatest caution when acting under Section 237 of the Act. It is to be noticed that the Central Govtrnment has the power under Section 235, read with Section 237 of the' Act to order investigation into the affairs of company. This power has been the subject matter of a large number of judicial decisions In Barium Chernicals Ltd & other v, Company Law Board', the Supreme Court had opportunity to deal with what .were the circumstances that would justify an opinion by the Central Government that the affairs of acompany needed investigation. It was obseryed that at least prima facie evidence should exist concerning the circumstances which would lead to the concelsion that an investigation was necessary v. Therfore, lam of the view that although the aforementioned interpretation of Sections 235 and 237 of the Act is restricted to the Central Oovernment a similar test must also be applied by the Court when dealing with this type of case. There also must be circumstances before the Court, which lead to an inference that there has been the type of mal-practice by the first respohdent or its Directors, which would justify an investigation of its affairs,For the purpose 'if determining whether the .petition Js maintainable it is suffcient to state 'the circumstances stated in the petition, arid I feel that these circumstances are not sufficient in' the present case to lead to an inference, even on reading the petition, that the affairs of the first respondent need an investigation.

(13) By a subsequent anplication, learned counsel for the petitioner brought tomynotice-a decision oCtnis Court reported as B M. Bajoria v. Union of India'. This authority does not seem to advance the case of the petitioner at all. It was concerned with an inspection of a company made under Section 209(4) of the Act. That Section authorises an Officer of the central Government to inspect the books of account of a company. In he course of the judgment some reference was made to Section 237 of the Act on account of the fact that it was urged that a police report should not be filed as a result of the inspection of the accounts under Section 209 of the Act, but the same could only be utilised for the purpose of filing a complaint if an investigation had first been carried out and a complaint filed under Section 242. This argument was rejected by the Court. I can see nothing in this judgment, which leads to all inference that the Court has to order investigation in the affairs of the company irrespective of whether there is any material to justify such an investigation.

(14) In the circumstances, I come to the view that the allegations made in the petition are insufficient to maintain this petition. I make it clear that this conclusion is based only on the allegations contained in the petition. It. by no means debars the petitioner from relying on other material for the same purpose. The petition is accordingly rejected on the ground that it does not disclose a cause of action. There will be no costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //