Case Law Companies Act Union Of India And Anr Vs Swadeshi Cotton Mills and Anr

Case Law Companies Act

Union Of India And Anr Vs Swadeshi Cotton Mills and Anr







CITATION: 1978 AIR 1818           

1979 SCR  (1) 735 1978 SCC  (4) 295


ACT: Practice  and  Procedure-Interference  by the  Supreme Court against interlocutory orders is permissible under Art. 136 of  the Constitution  only when ends of justice dominate and  if  public  interest  so  dictates-Company  Law  Board inducting  additional  Directors  under  s.  408(1)  of  the Companies Act-High Court cannot  stay  the  orders  at  the interlocutory stage  unless there are good grounds to STRIKE down the  order. Benefit  of reasonable doubt belongs to the specialised body.



HEADNOTE: The Company  Law Board  by its order dt. 17th December, 1977 inducted  several additional  directors in  addition to the existing  directors of  the respondent company, under s. 408(1) of  the Companies  Act, 1956,  since it  was  of  the opinion that  the affairs  of the  company in  question “are being conducted  in a  manner which  is prejudicial  to  the interest of  the company  and to  public interest”.  But the Delhi High  Court passed  an ad  interim stay  of  the  said orders, while admitting the writ Petition. Allowing the appeal by special leave, the Court

HELD: Where  repercussions are  incalculable  and  the basis of  the direction,  though interlocutory,  is obscure, the ends  of justice  dominate and  the  Supreme  Court  may interfere, if  public interest so dictates under Art. 136 of the Constitution. [736B] (2) A  company of considerable financial dimensions and involved in  operations using public resources as investment naturally becomes  the concern not merely of the Company Law Board but  also all  of the economic process of the country. The  specialised   body  with   responsibility  to  watchdog corporate  process   is  the  Company  Law  Board.  When  it investigates and  reaches a  definite conclusion and makes a consequential direction,  it  is  entitled  to  prima  facie respect  unless  there  are  glaring  circumstances  to  the contrary. It  may well be that the order of the Board may be vitiated by infirmities, legal or other. It may also be that the reasoning of the Board and the factual foundation for it is sound.  In such  situations acting  at  an  interlocutory stage, the  benefit  of  reasonable  doubt  belongs  to  the specialised body.  If there  are good grounds to strike down the order  certainly the High Court has jurisdiction to stay its operation. [737D-G]

JUDGMENT: CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 1501 of 1978. Appeal by Special Leave  from the  Judgment and  Order dated 18-1-1978  of the  Delhi High  Court  in  Civil  Misc. Petition No.  1120-W of 1977 and 109/78 in Writ Petition No. 585/77. Soli J. Sorabjee Addl. Sol. General, Girish Chandra for the Appellant. 13-549 SCI/78 736 S. T.  Desai, B.  P. Maheshwari  and Suresh  Sethi for Respondent No. 1. A. K. Sen and Vineet Kumar for Respondent No. 2. ORDER An ad interim order of stay passed by the High Court of Delhi has  been challenged  before us  in  this  appeal.  We should have  hesitated to  interfere with  an  interlocutory order following the usual practice in this Court. But, where repercussions  are   incalculable  and   the  basis  of  the direction; though  interlocutory, is  obscure, the  ends  of justice dominate  and we may interfere if public interest so dictates. Here is  an order of the  Company Law Board under sec. 408(1) of  the Companies  Act, 1956, which gives a wealth of facts and  a variety  of  reasons  to  support  an  ultimate direction which runs thus: “Since all  the three    conditions referred  to  in sub-section (1) of sec. 408 of the Companies Act, 1956, are established  on the  facts and circumstances of the case, the Company Law Board hereby appoint officers for three years,  in addition to the existing directors of the company:- 1. Shri B.  M. Kaul, Member, Railway Board (Retd.) 5- J-4 Jawahar Nagar, Jaipur.

2. Shri A. K. Mazumdar, Chief Secretary, Orissa Govt. (Retd.)  26/2, Dover  Road, Apartment  No.  4, Calcutta-19. 3. Shri P.  K. Choksi,  Senior Partner,  Price  Water house Pest  & Co., B-4, Gillander House, Calcutta- 1. 4.  Shri S.  K. Mitra,  President, Institute of Cost & Works Accounts  of India, 14-A/6 Western Extension Area, Karol Bagh, New Delhi-5. 5. Shri P.  A. S.  Rao,  Formerly  President  of  the Institute of    Company Secretaries of India, C-7/7, Vasant Vihar, New Delhi. 6. Shri M.  C. Bhatt, Joint Secretary, Govt. of India (Retd.) B-22, Defence Colony, New Delhi-24. 7. Shri Triloki Nath Sharma, Business Executive, 247, Mohan Nagar,  G.  T.  Road,  Sahibabad,  Ghaziabad (U.P.) 737 The Company  Law Board direct further under sub-section (6) of  sec. 408 of the Act that Shri B. M. Kaul will act as Chairman of the Board of Directors of the Company. In accordance  with the  order passed by the Delhi High Court on  24th August,  1977, referred  to hereinbefore  the implementation of  this order  will be  subject to any order that may  be passed  by the  Delhi High  Court in the matter pending before it.” This order,  which inducted  seven additional directors was based  on the  ground that the affairs of the company in question  “are   being  conducted   in  a  manner  which  is prejudicial to  the interests  of the  company and to public interest.” The  High Court,  after hearing  counsel on  both sides, passed a laconic order that: “We consider    that the proper order to be made, in view of  the circumstances       of the case, is to stay the operation of  the order of the Company Law Board, dated 17th December,  1977, except  as  regards

Shri  P.  K. Choksi, Shri  S. K.  Mitra and Shri P. A. Rao, and also to direct that the  said three gentlemen will not vote at the  meetings of  the Board  of Directors  till the disposal of the writ petition. We order accordingly.” A company  of  considerable  financial  dimensions  and involved in operations using public resources as investment, naturally becomes  the concern not merely of the Company Law Board but  also of  the economic process of the country. The specialised body  with responsibility  to watchdog corporate process, is  the Company Law Board. When it investigates and reaches a  definite conclusion  and  makes a consequential direction, it  is entitled  to prima  facie  respect  unless there are  glaring circumstances  to the contrary. We do not wish to  make any  observations on  the merits of the matter since the  High Court  is seized of the case. It may well be that the  order of the Board may be vitiated by infirmities, legal or  other. It  may also  be that  the reasoning of the Board and  the factual  foundation for  it is sound. In such situations, acting at an interlocutory stage, the benefit of reasonable doubt belongs to the specialised body. Of course, as stated  earlier, if there are good grounds to strike down the order, certainly the High Court has jurisdiction to stay its operation.  However, we find nothing stated in the order itself indicating  why the High Court prima facie thought it necessary substantially to stay the operation of the Company Law  Board’s   order  of   induction  of  seven  persons  as directors. Nor have we any light regarding the total eclipse of four  directors and  the partial  eclipse  of  the  other three. Unfortunately,  the inscrutable face of a sphinx does not go  well with  the judicial process. Whatever might have been 738 the basis  of the  High Court’s  order-we do  not  make  any comments thereon-we  are inclined  to  nullify  the  interim stay.  Our   inclination  is   explained  by  the  prefatory observations  we  have  earlier  made  in  this  order.  To expatiate more  may prejudice  one side  or  the  other.

To indicate this much is obligatory to explicate ourselves. There was some argument at the Bar about an order under sec. 18AA  of the  Industries (Development  and  Regulation) Act, 1951, and its impact upon the order impugned before us. Maybe, by  virtue of  that appointment, the entire  company comes under  the control  of the authorised person appointed under that  provision. It  is not for us to explore here the effect and  import of  the order  of the  Central Government under section 18AA and we desist from doing so. All that we need do and that we can do in the present appeal is to allow it so  that the Company Board’s direction in regard to seven additional directors  will come  into full  force until  the final decision of the High Court. We allow the appeal. We may  make  it  clear  that  the learned  Additional Solicitor General  did assure  the court  that nothing which will stultify  the two  writ petitions before the High Court will be  done by  the Company  Law  Board  or  the  Central Government. We hope the High Court will dispose of the case very expeditiously. S.R.

Appeal allowed. 739

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