M.P. Menon J.
1. This is a petition under Section 237(a)(ii) of the Companies Act. The petitioner is a member of a company, and he wants an order declaring that its affairs require investigation by an inspector appointed by the Central Govt. Before going into the facts of the case, it is necessary to examine under what circumstances such a declaration could be made.
2. Section 237 of the Act reads:
'Investigation of company's affairs in other cases.--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.'
3. Counsel suggests that the discretion conferred on the court under Clause (a)(ii) is wide and uncontrolled and that the court can pass an order whenever it is satisfied, on a scrutiny of the materials placed before it, that an investigation is called for. The petitioner can prove his allegations before the inspector, when one is appointed, it is said : the court isonly to see whether prima facie they have substance. But the question still remains on what kind of material the court can act. Going by the section, the inspector is to investigate into the affairs of the company, and not into the specific allegations made by a petitioner, suggesting thereby that the allegations or the materials should be such as to satisfy the court about the need for such an investigation. Section 237(b) enumerates the circumstances under which the Central Govt. can suo motu order a similar investigation ; and the discretion there is not uncontrolled. The Central Govt., before exercising its power thereunder, should form an opinion that circumstances suggesting the existence of one or other of the matters specified in Sub-clauses (i) to (iii) are there. It should form an opinion that there are circumstances to suggest--;
(i) that the business of the company is being carried on with intent to defraud its members, or otherwise for a fraudulent or unlawful purpose ; or
(ii) that it is carried on in a manner oppressive of its members ; or
(iii) that the company itself was formed for a fraudulent or unlawful purpose ; or
(iv) that the persons concerned with its formation or management are guilty of fraud, misfeasance or other misconduct in connection with the formation or management; or
(v) that due information is withheld from the members.
4. It is not as if a member can make any allegation and the Central Govt. can order an investigation on being satisfied that it calls for a further probe. The nature of the allegations must have relevance to the matters enumerated in Clause (b). The question then is, is the situation . different when the court has to decide under Clause (a) about the desirability of an investigation
5. The answer to my mind lies partly in the history of company law, and partly in some of the other provisions of the Act. A company is an association of men or women for trading, more or less like a partnership. In a partnership, the members are few, and each has confidence in the other. When the members participating in the association are few, ' their relationship can be worked out within the confines of contract and agency. But when their number is large, a different form of organisation will be necessary. In the initial stages, these unincorporated bodies were developing in England on the lines of quasi-partnership with fluctuating membership. But as the law of contract and agency could not be fully applied to a situation where the actual management of the business was in the hands of a few, with the bulk of the members forming the association waiting outside, the Chancery courts of England started to apply the equitable doctrine of trust to those larger bodies. Those inmanagement of the business of the association were held to be occupying a fiduciary position, with certain fiduciary duties, in relation to the association and its members. Basically, the business association, or the company as it came to be called, rested on contract between the members; but in certain respects, the members in management (i. e., directors) were held to have fiduciary duties, as distinct from contractual. The sanctity of contract which was the philosophy of the 18th and 19th centuries, as modified by the rules of equity developed by the equity courts, thus contributed to the development of company law even before Parliament thought of legislating on the subject. It was the Joint Stock Companies Act of 1844 which first drew the distinction between a partnership and a company. The enactment provided for registrations of associations with more than 25 members. Limited liability was recognised only in 1855, and it was only under the Joint Stock Companies Act of 1856 that registration became a matter of course. Even after the Companies Act of 1862 was placed on the statute book, the position was that the members of a, company, particularly those in a minority, had little control over the directors in actual management. If the minority could approach the equity courts with complaints of breach of trust, they obtained some redress, and not otherwise.
6. In Foss v. Harbottle  2 Hare 461, it was held that the courts could not normally interfere with the internal management of the company at the instance of a minority of members dissatisfied with the conduct of its affairs by the majority. This approach was sought to be justified on various grounds. The first was that the members who had contracted to abide by the decision of the majority could not complain against something to which they had agreed. The second was that -the majority alone knew what was good for the association or company, and that the court's views could not be imposed on them. And the third was that as the company was a separate juristic person, it alone, or at least only a majority of its members, could complain of any injury to it, and not a minority. In Salomon v. Salomon & Co.  AC 22, the House of Lords went to the extreme of refusing to discover dummies and nominees behind the veil of incorporation, by placing emphasis on the separate legal personality of the company. In spite of the fact that free transferability of shares is one of the important features of any company, it was held in In re Gresham Life Assurance Society : Ex parte Penney  8 Ch App 446, that where the articles of association vested an absolute discretion in the directors of a company to refuse to recognise a transfer of shares, the court would presume that the directors had exercised the power bona fide. They could not be compelled to disclose reasons for their refusal, unless want of good faith was affirmatively established bya petitioner. Dishonesty, fraud, bad faith, breach of trust and the like were the minimum to be established by individual shareholders before they could get any equitable relief from the Chancery courts; in all other cases, the contract was supreme.
7. The various provisions of the Companies Act relating to minority protection have to be examined in the above background if their true content is to be discovered. Chapter VI deals with 'oppression and mismanagement'. Section 397 enables the minority shareholders to approach the court with a grievance that the company's affairs are being carried on in a manner oppressive to them, and Section 398 provides for a like complaint that the affairs of the company are carried on in a manner prejudicial to public interest or to the interests of the company. Oppression or mismanagement, in the context, have been understood as conduct involving lack of probity or bona fides. When the directors of a company with their majority support conduct themselves in a manner inequitable, i. e., when their conduct is tainted with lack of probity or selfish interest (as distinct from the interests of the company and the public), the court can step in and rectify matters. What lies behind the statutory provisions is a breach of the fiduciary duties the majority is supposed to honour and the basis of the complaint itself is that there is a breach of such duties. Section 408 confers a similar power on the Central Govt. to rectify matters, if the minority is able to satisfy that authority that similar circumstances verging on breach of trust are there. Winding up is another remedy available to minority shareholders when they find that those in management of the company have failed in their duties, some of which are statutory and some, fiduciary. Section 433(f), in particular, makes a provision for winding up on 'just and equitable' grounds. Section 542 is an instance where even a single contributory can approach the court, in the course of the winding up of a company, for a declaration that the persons in management be held liable for fraudulent conduct of business. Misfeasance proceedings contemplated by Section 543 are also intended to assess and recover damages from persons responsible for a misapplication of the company's funds and properties, and for breach of trust. The thread running through all these provisions is the existence .of a duty on the part of those in control of the affairs to conduct themselves more or less like trustees, and a liability to account when they are in breach thereof. When the majority of shareholders find that the directors are acting improperly or that the company's affairs are mismanaged, they could remove the directors in a general meeting; they need not go to court. But when the minority has a similar grievance, all that they can do is to approach the court. The provisions are thus intended to protect minority interests on the footing, and on the onlyfooting, that their rights are being trampled upon in an inequitable orunconscionable manner. They are thus exceptions to the rule in Foss v.Harbottle  2 Hare 461, that a minority cannot ordinarily invite thecourt to look into the internal affairs of a company. And each of theexceptions rests on the principle that dishonesty, fraud, want of goodfaith, misfeasance, breach of trust and the like are remediable in equity,irrespective of contractual obligations.
8. The provisions of Sections 235 - 251 dealing with ' investigation ' recognise only another form of the remedy available to the minority shareholders. While Sections 235 - 237 deal with the circumstances under which investigation could be ordered, Sections 238 - 241 deal with inspectors, their powers and the report they have to make. Once the report is made, follow-up measures are contemplated by Sections 242 - 244. Section 242 provides for the prosecution of those found criminally liable. Section 243 empowers the Central Govt., through a person authorised by it, to apply for a winding-up on ' just and equitable ' grounds or to apply for the removal of the oppression and mismanagement. And Section 244 conceives of proceedings in misfeasance. The purpose of the investigation is thus to find out whether those in charge of the affairs of a company are guilty of illegal conduct or of conduct trenching upon breach of fiduciary obligations. That is way Section 237(b) speaks of unlawful purpose, fraud, oppression, misfeasance and misconduct. Whether it be under Section 235 when the Central Govt. acts on the application of a group of members, or under Section 237 when it acts suo motu or under orders of court, the machinery for investigation is to be set in motion only in the context of a complaint regarding breach of duties which equity has imposed on the majority.
9. If the above be the true position, it follows that in proceedings under Section 237(a)(ii), the court will look into only those allegations which have a bearing on the fiduciary duties of the majority, or their duty to abide by the law. Of course, the court need not satisfy itself that the allegations are true, it is enough if a prfma facie case is made out. No investigation can be ordered merely because the petitioning shareholder feels aggrieved about the manner in which the company's affairs are being carried on, or because the court thinks that they could be better managed. The remedy being equitable, the court has also to satisfy itself that the petitioner has come to court bona fide for obtaining redres-sal, and not for any other purpose. An isolated instance of mismanagement, already remedied, could not also justify the passing of an order under Section 237(a)(ii).
10. As to the facts of the case, the petitioner is a shareholder of the Mathrubhumi Printing and Publishing Company Ltd., Calicut, a company engaged in the printing and publishing of, mainly, the Malayalam dailynewspaper 'Mathrubhumi' from Calicut, Cochin and Triyandrum, The late Mr. V.M. Nair was the managing director of the company till his death in May, 1977. He was occupying that position at least from 1958, and on his death, there was a change in management. One M.J. Krishna Mohan succeeded him and continued in office till November, 1979, when he too passed away. The present managing director is a cousin of Krishna Median. The company petition was filed in June, 1979, i.e., after the death of Sri V.M. Nair and while Krishna Mohan was alive. The petitioner was the advertising representative and special correspondent (or part-time news reporter) for the newspaper at Bangalore. The arrangement regarding news reporting was terminated in February, 1978. The advertising agency was also terminated by April 1, 1979. He had filed a suit against the company ; that was dismissed, but the matter is pending in appeal. He had raised certain claims before the Labour Court and there he succeeded ; but the company has challenged the decision in writ proceedings. An industrial dispute, and a criminal complaint filed by the company against him, are also said to be pending. What is relevant to notice is that the relationship between the petitioner and the present management of the company is somewhat strained, and that the company petition itself was filed soon after his advertising agency was terminated. And, if the proceeding of the 56th annual meeting of the company is any guidance, there are at least two groups, among the members, one supporting the present management and another loyal to the old.
11. Thought number of allegations are raised in the petition, Mr. Ramanatha Pillai for the petitioner pressed only some of them at the hearing; and I am dealing with only those allegations.
12. The first relates to the alleged theft or loss of newsprint. At the 54th annual meeting held on January 29; 1977, a member complained that a large quantity of newsprint belonging to the company was stolen and sold in black market by some people. Since the management took no action, the question was again raised at the 55th meeting held on March 27, 1978. A committee was thereupon appointed to go into the matter and at the 56th annual meeting, the convenor, of the committee informed members that, there was a prima facie case. These are the bare averments in para. 3 of the petition. There, is no allegation that the directors or their friends or relatives were involved, or that the management attempted to cover up the matter. At the most, the allegation is that there was some theft or loss some time during 1975V76 and that the management has failed to take any action.
13. Exhibit A-2 is the report of the committee. It is dated July 21, 1979, and was made available to the company in August, 1979. The petitioner was examined as P.W. 1 in January, 1981, and by this time he couldrefer to its contents also. Still, all that he has said in evidence is that 7 to 8 tons of newsprint were stolen or otherwise lost in 1974, and that in spite of Ex. A-2 report, the management has not taken any action.
14. Exhibit A-2 shows that according to the then manager, Sri Krishnan Nair, he was authorised to dispose of waste newsprint (discoloured, sticky, broken, with no tensile strength), and that he had allowed the watchman, Beeran Haji, to keep a lorry load in a separate godown, pending disposal, as the company's godowns were full. The value of the waste was fixed by the press superintendent and, after sale; the proceeds were made over to the company. Beeran Haji, however, was not sure whether the reels were waste. The committee came to the conclusion that the transaction was not above suspicion, though there was no evidence, of theft as such ; it was not at any rate impressed by Sri Krishnan Nair's version. It is even possible to think that in the opinion of the committee, Krishnan Nair was in some way responsible for the loss. The committee also noted that after the alleged incident, the machinery for dealing with waste newsprint had been improved. There is also evidence to show that waste can legitimately go up to 12%, that the percentage for the company during the relevant period was around 9%, and that all the rest of the paper was used and accounted for as good quality, according to the Audit Bureau of Circulation. Even assuming that the allegation of theft or loss is true, and that Ex. A-2 contains any specific finding, it is difficult to see what useful purpose would be served by ordering an investigation at this distance of 'time into an alleged theft of 1974. The petitioner was aware when he came to this court that the committee was looking into the matter; it was not as if the management had hushed it up or had failed to take any action. Exhibit A-2 discloses that even if there was some scope for malpractice in 1974, the machinery for dealing with waste news-print has since been strengthened and streamlined. The committee itself does not place the blame on the directors then in management; and the matter was allowed to be raised and discussed at three general body meetings, suggesting thereby that there was no attempt to stifle minority criticism or to suppress anything. In any event, the material available is insufficient to disclose a prima facie case regarding breach of fiduciary duties. I may add that the petitioner himself had suggested at the 56th meeting that a 'memorial' be created to honour ex-manager, Krishnan Nair, for the valuable services rendered by him while in service,
15. The next complaint is about irregularities and corruption in the purchase of a flat at Bombay. All that is stated in para. 4 of the petition is that there was such an allegation and that the committee had enquired into it. The petitioner's evidence as P.W. 1 does not also take us any further. Exhibit A-2 shows that the flat was purchased during the tenureof Sri V.M. Nair, and that the administrative officer of the company was responsible for negotiating the deal. According to this officer, he had acted under the instructions of Sri V.M. Nair. The majority of the committee recorded that though this could not be verified, as Sri Nair was no more alive, there was reason to think that sufficient care was not taken. One of the members of the committee dissented, and indicated that the attempt was only to malign the old management. The company's lawyers, who examined Ex. A-2 report, expressed the opinion that there was nothing but suspicion and no action could be taken on its basis. After a careful reading of Ex. A-2, I am inclined to agree with this view. Of course, the majority had made an observation in Ex. A-2 report that the title obtained was not perfect and that the full consideration was paid before getting the title deed. When Mr. Ramanatha Pillai highlighted this aspect at the hearing, I directed the management to produce the title deed. But when it was produced along with certain other documents, it was contended that production of documents at that stage could not be allowed. I am not inclined to take such a technical view of the matter because if that be the case, most of the allegations in the petition could only be considered as vague and unspecific. Some of them could not even be considered as allegations. The petitioner's attempt may be to settle some scores with the present management, but so far as the court is concerned, the attempt should be to find out whether the minority shareholders have anything real to complain of. I am, therefore, marking the documents as Exs. C-1 to C-10. The title deed, Ex. C-l, discloses that transfer of flats in Bombay was being made by transferring shares in the building company and that the company herein acquired the concerned shares on the day the consideration was paid. Sri V.M. Nair himself has signed Ex. C-l. The flat is admittedly in the exclusive and undisturbed possession of the company. On the materials available, therefore, I, am unable to hold that misfeasance, misconduct, breach of trust or fraud have been established, prima facie, in regard to this transaction.
16. Another case is about the writing off of large sums as bad debts, and the allegation in the petition is only this ;
' It is also seen from Ex. P-l proceedings that large sums are written off in the financial year to which Ex. P-l relates.'
17. There is no complaint, at least in the pleadings, that the amounts were recoverable, or that they were written off in order to benefit the directors or their favourites, or that the action was in any other way irregular or improper. Exhibits C-2 to C-10 show that the Board had decided to write off the amounts concerned at three different sittings. The amounts were outstanding from advertisers, agents and other people numbering about 160.Exhibit P-1 referred to in the petition is Ex. A-1 minutes of the 56th annual meeting; and the only question at the meeting relating to writing off was whether charges for printing the Janata Party posters for the Chickmagaloor election were also included in the amounts written off. The suggestion was denied and it was pointed out that the election itself was held during the previous financial year and that printing charges for posters had been fully realised. An interesting interlude was a suggestion by someone that only printing charges due from the Congress party were being written off in the past. The amount written off during the year in question was Rs. 1,02,623. For the year ended July 31, 1977, the amount written off was higher. A large amount is seen written off during 1979-80 also. Taking into account the business turnover and the accounting practice of the company, it cannot be said that anything unusual had taken place during Ex. A-1 year. The auditors had raised no objection and the general body had approved the accounts. In my opinion, this allegation of the petitioner is devoid of any merit.
18. The next grievance relates to the purchase of some land at Trivandrum. There was no reference to such a complaint either in the petition or in the reply affidavit filed in September, 1979. The point was raised in para. 4 of the reply affidavit dated October 23, 1980, in the following manner:
' It may also be kindly noted that Sri Damodaran who is found to be one of the employees responsible for the deal in respect of the purchase of the flat in Bombay has again been allowed to participate effectively in the transaction regarding the purchase of property by the company in Trivandrum which again is a reckless venture whereby the company is put to loss.'
19. The evidence of P.W. 1 is to the effect that the land was purchased for starting the Trivandrum edition of the newspaper and that it is kept vacant, while the Trivandrum edition is being published from some other premises. There is also a statement that more than one lakh of rupees was spent for acquiring land in a marshy area. But when it came to argument, the point stressed was that it was an unwise policy to have acquired land and then depended on other premises for the Trivandrum edition. The company has produced documents to show that land in the neighbourhood is being sold at three times the rate it had paid. It is also explained that the equipment and machinery for the Trivandrum press had arrived, and that their erection and the publication of the Trivandrum edition could not have been postponed. The evidence discloses that about one crore of rupees was set apart for the Trivandrum edition, and that there was a prolonged strike and lock-out in the meanwhile. There is thus no material to hold that the investment of about a lakh of rupeesin land, to be eventually used for housing the Trivandrum project, was a reckless venture or a foolish adventure.
20. Paragraphs 5 and 5A of the petition deal with another charge, and that relates to the appointment of one Sri Manakalath as public relations manager of the company in June, 1978. It is alleged that he was appointed without a board resolution and without inviting applications for the post, and that he was allowed to draw large sums as T.A. advance without vouchers. It was, however, conceded at the hearing that the managing director was competent to appoint such officers without the Board's sanction and that there was no practice of inviting applications for such posts. The person concerned was working at Madras as' the company's advertisement representative, and there is evidence to show that his appointment as P.R.M. was followed by an increase in advertisement revenues. The main attack was directed against payment of advances. R.W. 1 has given evidence that all payments were effected only against vouchers and that bills and accounts were being subsequently presented, verified and adjusted. The auditors have raised no objection. The reports of the directors and auditors, as also the balance-sheet and profit and loss accounts, were duly passed during every year. Counsel referred to some discrepancy in one of the answers given at the 56th annual general meeting, but the control and supervision of finances and accounts should normally be left to those in charge and the auditors, subject to acceptance by the general body. There is no evidence regarding any particular disbursement or voucher, even if such a matter could be gone into in proceedings like the present.
21. Another matter raised in paras. 5 and 5A concerns the appointment of one C.G.K. Reddi as adviser. The allegation is that he entered, into an agreement with a foreign concern for the monopoly supply and distribution of the company's publications and that this was done without the sanction of the Reserve Bank and to the detriment of the company. My attention has not been drawn to any passage in the evidence of P.W. 1 dealing with want of Reserve Bank sanction or detriment to the company. All that was said by P.W. 1 was that the agreement had not benefited the company and that there was some litigation. It was also added that there was no board resolution authorising Sri Reddy to enter into the contract. The company's answer is that Reddy was appointed as adviser for one year for modernising the company and planning the Trivandrum project. He had acquired experience as general manager of the 'Deccan Herald' and as business manager of the 'Hindu'. The evidence of R.W. 1, along with the documents produced, show that Reserve Bank permission had been obtained, that the agreement was entered into with the full concurrence, of the managing director after effecting modifications suggested by him, and that the arrangement hadcome to an end within a matter of days because of some ban ordered by the U.A.E. government. There is no evidence of litigation loss, detriment, illegality or even unauthorised dealing. This complaint should also, therefore, fail.
22. Another allegation which, if proved, would have been a matter of some substance, is about the appointment of one Sri P.V. Chandran as the director of the company. What is argued is that he was a partner in a firm of advertisers with which the company had dealings, and that he was appointed in violation of Section 299 of the Companies Act inasmuch as his interest in that business was not disclosed. But the allegations in paras. 9 and 9A of the petition make no reference to Section 299, but only to the extending of credit facilities to the firm as a 'non-accredited' advertising agent. From the evidence, however, it is clear that such agents are also given credit facilities, though for a shorter term. The decision to appoint Sri Chandran as director was taken at the board meeting held on May 14, 1978 ; he was not present at the meeting. Exhibit B17 dated July 14, 1978, is a letter from Chandran, in reply to the company's letter dated June 2, 1978, disclosing his interest in the firm. R. W. 1 says that though the firm was a valuable customer, no fresh contract was given to it after Sri Chandran was appointed as director. He resigned from the firm by the end of March, 1979. Violation of Section 299 is thus not made out.
23. Paragraph 7 of the petition complains of the company's attempt to borrow one crore of rupees, when it has a paid up capital of less than nine lakhs only. The interest liability would be too much for the company, it is averred. It is added that ' in the peculiar circumstances now obtaining in the company, there is every reason to suspect the bona fides of the management in the matter '. The company's answer is that newspaper business had become highly competitive with other papers like Malyala Manorama starting editions from different centres and that it was, therefore, decided to expand the company's business by starting a Trivandru'm edition of the Mathrubhumi and that the borrowing was intended to raise funds for the purpose. The decision to borrow was actually taken at an extraordinary general meeting held on June 23, 1969. It was unanimous and the petitioner was also a party to it. If this be the true position; I fail to see how he-could challenge the bona fides of the decision and how it could be said that that anyone is guilty of breach of fiduciary duties.
24. The last complaint is that ' information regarding the affairs of the company and its working are purposely withheld from the members '; and the company's answer is that members of the company have access to all the records of the company as laid down in the Companies Act. P. W. 1 has no case that any particular information he wanted has been withheld. What is suggested by counsel is that some of the questionsasked by members at the 56th meeting (Ex. A-1) remained unanswered. Disclosure is no doubt one of the fundamental principles underlying the formation and working of a company. Members have a right to know how the company's affairs are conducted. Creditors would also like to learn about its financial position. Even members of the public are interested, at least from the point of view of future investment. The Companies Act, therefore, provides for maintenance of registers, books, records and for publication and compulsory disclosure of accounts duly audited. Every company should have a registered office and that office must maintain the memorandum and articles of association, register of directors, of members, and other books and files regarding share capital and other matters. The accounts should be audited every year and annual returns are to be submitted. Charges should be registered. All these are available for inspection by members of the company and even by the public. The audited accounts have to be placed before the annual general body for the information of the members. The directors have to report every year to the shareholders in general meeting. Extraordinary general body meetings are also held. These are some of the provisions of the Act which insist on supply of information to members and others. But that does not mean that every question asked at every general meeting should be forthwith answered, without even considering whether they relate to the affairs of the company as understood in law, and whether it would be possible to answer such questions without due notice. A business organisation like a company cannot function like a legislative assembly, if only for the reason that the powers of the directors and the members in general body are defined. Section 237(b)(iii) speaks of 'information with respect to its affairs which they might reasonably expect', i.e., the information sought for must be about the affairs of the company and something which could reasonably be expected to be supplied. No attempt has been made before me, either in the course of evidence or at the hearing, to point out that any particular information of such a character has been withheld.
25. On an anxious consideration of the materials on record and the arguments advanced, and even overlooking the unsatisfactory nature of the pleadings, I am unable to hold that circumstances suggesting the existence of fraud, illegality, misfeasance, misconduct, etc., have been made out even prima facie, so as to relax the rule in Foss v. Harbottle  2 Hare 461 and direct an investigation into the internal affairs of the company. The company petition is, therefore, dismissed, but without costs.