Companies Act Case Law Rohtas Industries Ltd Vs S D Agarwal

PETITIONER:
ROHTAS INDUSTRIES LTD.

Vs.

RESPONDENT:
S.D. AGARWAL & ANR.

DATE OF JUDGMENT:
16/12/1968

BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
SIKRI, S.M.
BACHAWAT, R.S.

CITATION:
1969 AIR 707 1969 SCR (3) 108
1969 SCC (1) 325
CITATOR INFO :
D 1970 SC 564 (26,228,229,231)
R 1970 SC1789 (14)
RF 1972 SC1816 (18)
RF 1974 SC2249 (10)
D 1976 SC1913 (18)
R 1978 SC 597 (86,222)
D 1982 SC 149 (1245)
C 1984 SC1271 (26)
RF 1987 SC1109 (26)
ACT:
Indian Companies Act (1 of 1956), s. 237 (b)(i) and (ii)-
Circumstances suggesting fraud-Existence of-If condition
precedent to action under section.

 

HEADNOTE:
On May 20, 1960, Albion Plywoods Ltd. resolved at a general
meeting to convert its preference shares into ordinary
shares. M/s. Sahu Jains were its managing agents. Some
time before, in April 1960, New Central Jute Mills Co. Ltd.
had sold the preference shares of Albion Plywoods which it
was holding. One S. P. Jain, against whom proceedings in
criminal courts were pending for acts of misfeasance and
malfeasance in relation to other companies, was controlling
both the New Central Jute Mills Co. and Sahu Jains. With
respect to this sale there was a complaint to the Department
of Company Affairs, Government of India, that the management
of New Central Jute Mills knew that the preference shares
would be converted into ordinary shares and so the sale was
effected at an undervalue so that, on conversion into
ordinary. shares they would fetch a higher price, and that
the transaction was effected for the benefit of the managing
agents, their friends and brokers, at the expense of the
shareholders. In the course of investigation into this
charge, it was discovered that the appellant-company had
also ‘sold 3000 preference shares of Albion Plywoods which
it was holding, on May 6, 1960. The appellant-company was
also controlled by S. P. Jain. On April 11, 1963 the
Central Government passed an order under s. 237(b) (i) and
(ii) of the Companies Act, 1956, appointing an inspector to
investigate into the affairs of the appellant-company and to
report thereon to the Central Government, on the basis that
the sale of preference shares was a fraudulent transaction
considered in the background of the association of S. P.
Jain with the appellant-company and other companies. The
appellant,company filed a writ petition challenging the
order. The High Court dismissed it on the ground that the
opinion of the Central Government was not open to judicial
review and that the declaration of the Government that it
formed the required opinion was conclusive.
In appeal to this Court, it was contended that under the
section, an inspector may be appointed only if, in the
opinion of the Government there are circumstances suggesting
that the business of the company was being conducted with
intent to defraud its creditors. members or other persons,
or for a fraudulent or unlawful purpose, or in a manner
oppressive of any of its members, or that the company was
formed for a fraudulent or unlawful purpose, or that persons
concerned in its formation ,or management have, in
connection therewith, been guilty of fraud, misfeasance or
other misconduct towards the company or its members; that
is, though the opinion of the Government is subjective, the
existence of the circumstances is a condition precedent to
the formation of the opinion and therefore, the Court was
not precluded from going behind the recitals of the
existence of such circumstances in the order, but could
determine, whether the circumstances did in fact exist, and
whether the Central Government took extraneous matters into
consideration.
HELD (per Sikri and Hegde, JJ.) : Sections 235 to 237 are
allied sections and form a scheme for investigation into the
affairs of a company.
109
The investigation under s. 237(b) is of a fact finding
nature which does not bind anybody. The Government is not
required to act on it and the company has to be called upon
to have its say in the matter. But, s. 237 takes its colour
from the other two sections and those sections show that
such an investigation is a very serious matter and should
not be ordered except on good grounds. The appointment of
an inspector is likely to receive publicity as a result of
which the company’s reputation and prospects may suffer.
The power to appoint an inspector is an inroad on the rights
of the company to carry on its business and would violate
the fundamental right of its shareholders under Art.
19(1)(f), unless the power is so interpreted as to be a
reasonable restriction in the interest of general public,
and not as an arbitrary power. It would be a reasonable
restriction if circumstances suggesting that the company’s
business was being conducted as laid down in s. 237(b) (i)
or that the persons mentioned in s. 237(b) (ii) were guilty
of -fraud or misfeasance or other misconduct towards the
company or its members, exist as a condition precedent for
the Government two form the required opinion, and, if the
existence of those circumstances is challenged, the Court is
entitled to examine whether those circumstances existed when
the order was made. Further, the Department of the Central
Government which deals with companies is a body, expert in
company law matters, and the standard prescribed under s.
237(b) is not the standard required of an ordinary citizen
but that of an expert who would take into consideration only
relevant material. [ 1 17 F; 11 8 G-H; 1 19 B, E; 128 H; 129
A-E]
Observations of Hidayatullah and Shelat, JJ. in Barium
Chemicals v. Company Law Board, [1966] Supp. S.C.R. 311,
followed.
Padfield v. Minister of Agriculture, [1968] 1 All E.R. 694,
Commissioner of Customs & Excise v. Cure and Deeley Ltd.
[1962] 1 Q. B. 340, Roncarelli v. Duplessis,. [1959] S.C.R.
(Canada) 121 and Read v. Smith, [1959] New Zealand Law
Reports, 996, applied.
Susannah Sharp v. Wakefield, [1891] A.C. 173, 179 and
Nakkuda Ali v. M. F. De S. Jayaratne, [1951] A.C. 66, 77,
referred to.
State of Madras v. C. P. Sarathy & Anr. [1953] S.C.R. 334,
Joseph Kuruvilla Vellukunnel v. The Reserve Bank of India &
Ors. [1962] 3 supp. S.C.R. 632, Hubli Electricity Co. Ltd.-
v. Province of Bombay, L.R. Vol. LXXVI I.A. 1948-49 p. 57,
Robinson v. Minister of Town and Country Planning, [1947] 1
K.B. p. 702 and Point of Avr Collieries Ltd. v.Lloyd George,
[1943] 2 All E.R. p. 546, not applicable.
In the present case, the only material on the basis of which
the impugned order was made was the transaction of sale of
preference shares of Albion Plywoods. But at the time when
the Government made the impugned order it did not know the
market quotations for the shares, and in fact, the market
price showed that no fraud was involved in the sale of the
shares. No Reasonable person, much less an expert body,
could have come to the conclusion that any fraud was
involved. if the Government had any suspicion about the
transaction it should have probed further into the matter
since the order could not be justified on the material
before it. The fact that one of the leading directors of
the appellant-company was a suspect in the eye of the
Government because of his antecedents was not a relevant
circumstance and should not have been taken into consi-
deration by the Government which was entrusted with the
responsibility of forming a bona fide opinion on the basis
of relevant material. [129 F-H; 130 A-D]
(Per Bachawat, J.) : The object of investigation under s.
237(b) is to find out whether in fact any fraud has been
committed. The section con-
110
fers an administrative and not a judicial power. is
discertionary and no appeal is provided against an order.
Such discretionary power must be exercised honestly and not
capriciously or arbitrarily or for Ulterior purposes. The
section must be interpreted in the light of its own language
and subject matter and not by reference to other sections or
other statutes. So interpreted, the condition precedent for
making the order under the section is the opinion of the
Central Government that there are circumstances suggesting
fraud and not the existence of the circumstances. If the
opinion of an administrative agency is the condition
precedent to the exercise of the power the relevant matter
is the opinion of the agency and not the grounds on which
the opinion is founded. The authority must form the opinion
honestly and after applying its mind to the relevant
materials before it. If it is established that there were
no materials at all upon which the authority could form the
requisite opinion, the Court may infer that the authority
passed the order without applying its mind, that is, the
requisite opinion is lacking and therefore the condition
precedent to the exercise of the power under the section is
not fulfilled. The opinion is displaced as a relevant
opinion if it could not be formed by any sensible person on
the material before him, the reason being, that the Court
may then infer that the authority either did not honestly
form the opinion or that in forming it, it did not apply its
mind. Within these narrow limits the opinion of the Central
Government is not conclusive and can be challenged in a
Court, but the Court has no power to review the facts as an
appellate body nor can it substitute its opinion for that of
the Government. Had the opinion been conclusive it would
have been open to challenge as violative of Arts. 14 and 19
of the Constitution. [131 E-H; 132 A-F; 133 E]
Corporation of Calcutta v. Calcutta Tramways Co. Ltd. [1964]
5 S.C.R. 25, Joseph Kuruville Vellukunnel v. Reserve Bank of
India, [1962] Supp. 3 S.C.R. 632, Hubli Electricity Co. v.
Province of Bombay, L.R. 76 I.A. 57, Ross-Clunis v.
Papadopoullos & Ors., [1958] 2 All E.R. 23, State of
Maharashtra v. B. K. Takkamore, [1967] 2 S.C.R. 583, 585,
588, Province of Bombay v. K. S. Advani, [1950] S.C.R. 621,
Nakkuda. Ali v. M. E. De, S. Jayaratne, [1951] A.C. 66, 77,
State of Madras v. C. P. Sarathy and Anr., [1953] S.C.R.
334, Swadeshi Cotton Mills Co. Ltd. v. State of U.P. & Ors.,
[1962] 1 S.C.R. 422 and State of Bombay v. K. P. Krishnan,&
Ors. [1961]1S.C.R 227, referred.
The learned Judge’s own observations in Barium Chemicals v.
Company Law Board, [1966] Supp. S.C.R. 311, 343, explained.
In the present case, no complaint with regard to the
impropriety of the sale of preference shares of Albion
Plywoods was made to the Central Government. There was no
material suggesting that the purchasers were benamidars of
M/s. Sahu Jains or their friends. The market price of the
,shares of Albion Plywoods on or about the date of sale was
not known to the Central Government when the order was made
and does not show that the transaction was fraudulent. The
charge that the sale was fraudulent was not communicated to
the appellant-company nor were they asked to give their
explanation on the subject. The Government did not seem to
rely on the transaction of sale of preference shares as
suggesting fraud. Therefore, there was no material before
the Government on which it could form the opinion that there
were circumstances suggesting fraud, and hence the opinion
was formed without applying its mind to the materials before
it and was in excess of its powers under s. 237(b). [135 E,
G; 136 H; 137 A-B, D]

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2274 to
2276 of 1966.
111
Appeals by special leave from the judgments and orders,
dated January 20, July 4, and July 5, 1966 of the Patna High
Court in C.W.J.C., Nos. 18 of 1966, 910 of 1965 and 397 of
1966 respectively.
M. C. Setalvad, M. C. Chagla, R. K. Garg, S. C. Agarwal
and S. Chakravarti, for the appellant (in all the
appeals).
Niren De, Attorney-General, V. C. Mahajan and S. P. Nayar,
for the respondents (in all the appeals).
The Judgment of S. M. SIKRI and K. S. HEGDE, JJ. was
delivered by HEGDE, J. R. S. BACHAWAT, J. delivered a
separate Opinion.
Hegde J. The only question that arises for decision in these
appeals by special leave, is whether the order made by the
Central Government in No. 2(4)-CL.1/63, Government of India,
Ministry of Commerce and Industry, Department of Company Law
Administration on April 11, 1963 is liable to be struck down
as not having been made in accordance with law.
The appellant in these appeals is a company incorporated
under the Indian Companies Act, 1913 having its registered
office at Dalmia Nagar, Shahbad District, Bihar State. It
is manufacturing paper, cement, sugar, vanaspati and other
articles. Its authorised capital is rupees 15 crores and
the paid up capital little more than six crores. It was
incorporated in the year 1933.
The impugned order reads
“No. 2(4)-CL.1/63
Government of India,
Ministry of Commerce and Industry,
Department of Company Law Administration.
ORDER
Whereas the Central Government is of the
opinion that there are circumstances
suggesting that the business of Rohtas
Industries Limited a company having its
registered office at Dalmianagar, Bihar
(hereinafter referred to as the said company)
is being conducted with intent to defraud its
creditors, members or other persons and the
persons concerned in the management of its
affairs have in connection therewith been
guilty of fraud, misfeasance, other misconduct
towards the said company or its members,
AND WHEREAS the Central Government consider it
desirable that an Inspector should be
appointed to investigate the affairs of the
said Company and to report thereon.
112
NOW, THEREFORE, in exercise of the several
powers conferred by sub-clauses (i) and (ii)
of clause (b) of Section 237 of the Companies
Act, 1956 (Act 1 of 1956) the Central
Government hereby appoint Shri S. Prakash
Chopra of Messrs. S. P. Chopra & Co.
Chartered Accountants, 31, Connaught Place,
New Delhi as Inspector to investigate the
affairs of the said company for the period
1-4-1958 to date and should the Inspector so
consider it necessary -also for the period
prior to 1-4-1958 and to report thereon to the
Central Government pointing out inter alia
irregularities and contravention in respect of
the provisions of the Companies Act, 1956 or
of the Indian Companies Act, 1913 or of any
other law for the time being in force and
person or persons who are responsible for such
irregularities and contravention.
(2) The Inspector shall complete the
investigation and submit six copies of his
report to the Central Government not later
than four months from the date of issue of
this order unless time in that behalf is
extended by the Central Government.
3. A separate order will issue with regard
to the remuneration and other incidental
expenses of the Inspector.
The Eleventh day of April, 1963.
By order and in the name of the
President of India
Sd/- D.S. Dang Deputy Secretary to the
Government of India”
The time granted to the Inspector has been repeatedly ex-
tended. For one reason or the other the investigation
directed is still in its initial stage. The various
extensions given for completing the investigation are also
challenged in some of the appeals. But that contention was
not debated before us. Hence it is not necessary to
consider that question.
The contention of the appellant is that the Central Govern-
ment had no material before it from which it could have come
to the conclusion that the business of the appellant company
is being conducted with intent to defraud its creditors,
members or other persons or the persons concerned in the
management of its affairs have in connection therewith been
guilty of fraud, misfeasance or other misconduct towards the
said company or its members.
113
In response to the rule issued by the Patna High Court Shri
Rabindra Chandra Dutt, the then Secretary to the Government
of India, Ministry of Finance, Department of Company Affairs
and Insurance and Chairman, Company Law Board, New Delhi
filed an affidavit in opposition on behalf of the
respondents. Therein various objections to the writ
petition were taken but the pleas raised by him in paragraph
5(a) and (b) of his affidavit are the only pleas relevant
for our present purpose. This is what is stated therein :
“I say that the true facts are -as under-
(a) Shri S. P. Jain together with his
friends, relations and associates is
principally in charge of the management of the
petitioner company. Over a long period,
several complaints had been received by the
Deptt. as to the misconduct of the said Shri
S. P. Jain towards companies under his control
and management. Some of these were referred
to and inquired into by a commission of
Inquiry headed by Mr. Justice Vivian Bose of
the Supreme Court of India, which in its
report, dated 15-6-62 made adverse findings
and observations against Shri S. P. Jain.
Shri Jain is being prosecuted in the Court
District Magistrate, Delhi under sections 120B
read with sections 409, 465, 467 and 477 of
the Indian Penal Code in regard to his
misconduct in the management of what are known
as the Dalmia Jain group of companies, and
most of the material upon the basis of which
this prosecution was launched was available to
the Central Government on 11-4-63. Shri Jain
is also being prosecuted in Calcutta for
misconduct in the management of Messrs. New
Central Jute Mills Co., Ltd., a company under
the same management as the petitioner
, on the
basis of an F.I.R. lodged by the Department
with the Special Judge, Police Establishment
just before the 1 1 th April 1963, Shri Jain
is also being proceeded against before the
Companies Tribunal under sections 388B and 398
for misconduct in managing the affairs of M/s.
Bennett Coleman & Co., Ltd. and details as to
Shri Jain’s misconduct were with the Central
Government as on 11th April, 1963.
(b) Complaints had also been received by the
Department before 11th April, 1963
specifically as to the misconduct on the part
of the manage-
114
ment of the petitioner company in the conduct
of its affairs.”
The High Court dismissed the writ petition holding that the
,opinion formed by the Central Government under s. 237(b) of
the Companies’ Act 1956 (hereinafter to be called as the
Act) is not open to judicial review; the impugned order
declares that the Central Government had formed the required
opinion and the same is conclusive. That conclusion of the
High Court is ,challenged in this Court.
When this appeal came up for hearing on 17-9-1968 this Court
directed the respondents to file a further affidavit placing
,on record the complaints mentioned in paragraph 5(b) of the
aforementioned affidavit of Shri Robindra Chandra Dutt. The
said affidavit was directed to be filed within a fortnight
from that date and the appellants were permitted to file a
reply affidavit within a week thereafter.
In pursuance of the above order Shri Sisir Kumar Datta
Secretary to the Government of India, Ministry of Industrial
Development and Company Affairs. Department of Company
Affairs New Delhi filed his affidavit on October 4, 1968.
Along with that affidavit he produced into Court three
complaints received by the Government which are marked as
Annexures ‘A’ to ‘C’. Shri Datta does not claim to have any
personal knowledge of the facts of this case. Therefore the
only additional material that is placed before us are the
three annexures marked as Annexures ‘A’ to ‘C’. Shri Niren
De, learned Attorney stated before us that the Union of
India had placed before the Court all the relevant material
it possessed bearing on the subject.
Annexure ‘A’ is said to have been submitted in June, 1960.
Most of the allegations contained therein are of vague
character. It was conceded by the learned Attorney that
those allegations could not have been the basis for making
the impugned order. ‘Therefore it is not necessary to refer
to them in extension One of the concrete allegations made
therein-on which allegation alone some half hearted reliance
was placed at the hearing-is that though the appellant
company had a debenture capital of Rs. 48,50,000, on 31-12-
39, Shreeram Harjimal, a father concern of Dalmia Jain Group
had pledged in various Banks debentures of the appellant-
company of the value of Rs. 1,07,47,000 and-raised a loan of
nearly rupees one crore. According to the complaint this
must have been done by forging some documents. The
complaint further stated that the appellant-company has
facilitated that fraud by paying interest on the entire
loans borrowed. The above allegation has been denied by the
appellant in the reply affidavit filed on its behalf. Mr.
Attorney conceded that the impugned order -could not have
been made on the basis of this alle-
115
gation as it directed an inquiry into the company’s affairs
primarily for the period subsequent to 1-4-1958 and the
allegation in question relates to transactions that took
place in about the year 1939 but at the same time he
contended that the allegation in question afforded the
necessary background in assessing the other allegations.
Some of the allegations contained in that complaint such as
the levy of Rs. 50 lacs fine on S. P. Jain should have been
known to the Government to be incorrect in view of the
various proceedings that had taken place earlier which were
within the knowledge of the Government.
In Annexure ‘B’ there are no specific allegations. The
learned Attorney did not rely on any of the allegations
contained therein as having formed the basis for issuing the
impugned order.
Annexure ‘C’ is a complaint relating to the working of New
Central Jute Mills Co., Ltd. it makes no reference to the
appellant-company. We were told that the New Central Jute
Mills Co. Ltd. is a sister concern of the appellant-company.
In paragraph 4 of that complaint following allegations were
made :
“The investments of the Company in Albion Ply-
Woods Ltd. and their variations by the
Company’s Managing Agents appear to have been
done to benefit the Managing Agents, their
friends and brokers, at the expense of the
shareholders. It appears that the preference
shares in this company were sold at the market
rate of Rs. 100 each when these could be
converted into ordinary shares of Rs. 10 each
which were then quoting at Rs. 15 in the stock
market. This and various other acts of
deliberate commissions and omissions require a
thorough investigation so that shareholders in
general may have a feeling of security in the
company.”
It appears that Albion Plywoods Ltd. at the relevant time
had a subscribed capital of rupees ten lacs made up of Rs.
50,000 ordinary shares of the face value of Rs. 10 each and
Rs. 5,000 preference shares of the face value of Rs. 100
each. Though the preference shares were not by right
convertible into ordinary shares, it appears in about the
end of April or beginning of May, 1960, the Albion Plywoods
Ltd. gave notice of a special resolution to permit the
conversion of the preference shares into ordinary shares and
the said resolution was passed by the General Meeting on May
20, 1960. On May 6, 1960 the appellant-company which held
3,000 preference shares of the Albion Plywoods Ltd. sold the
same to M/s. Bagla & Co. for the face value. Annexure ‘C’
was forwarded to the Regional Director, Company Law
Administration, Calcutta for inquiry and report. At this
stage it may be noted that the inquiry in question was
directed against the New Central Jute Mills Co., Ltd. and
not against the appel-
116
lant company. The Regional Director submitted his report on
November 1 0, 1961. In his report he opined that the
transaction complained of is of a doubtful character and
therefore further inquiry is desirable. Thereafter on
December 2, 1961 the UnderSecretary to the Government of
India wrote to the Regional Director asking for some further
information. One of the points on which information was
called for was whether Sahu Jain’s Co’s (other than New
Central Jute Mills Co. Ltd.) who were holding 3,000 shares
of Albion Plywoods Ltd. had also transferred their shares to
Bagla & Co./Podar and Sons and to give full details thereof.
The Regional Director was also asked to report whether the
preference shares of the Albion Plywoods Ltd. carried any
voting rights before conversion. In that letter it was
further observed :
“In this regard it is suggested that discreet
enquiries may be made to find out the names of
the partners of Bagla and Company and Poddar
Sons and also whether, the said brokers were
actively associated with the Sahu Jains. If
considered necessary, the help of the Officer
of the Stock Exchange Division of the E. A.
Department recently posted at Calcutta may be
sought in this regard.”
On January 29, 1962, the Regional Director replied to that
letter. In his reply he stated :
“I have been able to gather the following
information regarding the 3,000 preference
shares of Rs. 100 each of Albion Plywoods Ltd.
The preference shares were acquired by Rohtas
Industries Ltd. (A Sahu Jain Company) on
allotment by the Albion Plywood Ltd. of such
shares on 15th June, 1951. These 3,000 prefe-
rence shares were sold to M/s Bagla & Co.,
on 6th May, 1960 at par for Rs. 3 lacs. It
would appear that these shares were sold
before 20th May, 1960 the date on which the
preference shares were converted into ordinary
shares.”
The Regional Director in his letter of 10th November, 1961,
had given the market quotations for the ordinary shares of
Albion Plywoods Ltd. on some of the dates in May, 1960.
According to him those quotations were gathered from ‘Indian
Finance’. Evidently as he was inquiring into the complaint
made against the New Central Jute Mills Co. Ltd. he did not
mention the market quotation for the shares in question
either on May 6, 1960 or immediately before that date.
During the hearing of these appeals an affidavit has been
filed on behalf of the appellant stating that the market
quotation of the ordinary share in the Albion Plywoods Ltd.
on May 6, 1960 or immediately before that date was Rs. 1 1.
117
Alongwith that affidavit, the relevant copy of the Indian
Finance was produced.’ It was not disputed before us that
the market quotation for the ordinary shares of Albion
Plywoods Ltd. on or immediately before May 6, 1960 was Rs.
11 per share. At this stage it may be mentioned that though
the Under Secretary to the Government required the Regional
Director to find out the names of the partners of Bagla &
Co. and whether, the brokers who dealt with the shares were
actively associated with Sahu Jain, it does not appear that
the Regional Director supplied those information.
Admittedly there was no material before the Government when
it issued the impugned order from which it could have
reasonably drawn the conclusion that the transaction in
favour of Bagla & Co. was either a nominal transaction or
was made with a view to profit the Directors of the
appellant-company or their relations. According to Mr.
Attorney the only circumstance on the basis of which the
Government passed the impugned order was the sale of 3,000
preference shares of Albion Plywoods Ltd. held by the
appellant-company though, according to him, the Government
viewed that circumstance in the background of the various
complaints received by it against Mr. S. P. Jain who was at
that time one of the prominent Directors of the appellant-
company, New Central Jute Mills Co. Ltd. and Albion Plywoods
Ltd., as well as the report made by the Vivian Bose
Commission which inquired into the affairs of some of the
companies with which Mr. S. P. Jain was connected.
Admittedly Vivian Bose Commission did not inquire into the
affairs of the appellant-company nor does its report contain
anything about the working of that company nor was there any
complaint against the appellant-company excepting that made
in Annexure ‘A’.
On the basis of the above facts we have now to see whether
the Government was competent to pass the impugned order.
Sections 235 to 237 of the Act are allied sections and they
form a scheme. They deal with the investigation of the
affairs of the company. To find out the true scope of S.
237 (b), it is necessary to take into consideration the
provisions contained in S. 235 as well as 236. They read :
“235. Investigation of affairs of company on
application by members or report by
Registrar.-The Central Government may appoint
one or more competent persons as inspectors to
investigate the affairs of any company and to
report thereon in such manner as the Central
Government may direct,-
(a) in the case of a company having a share
capital, on the application either of not less
than two hundred members or of members holding
not less than one-tenth of the total voting
power therein;
118
(2)in the case of a company not having a share
capital, on the application of not less than
one-fifth in number of the persons on the
company’s register of members;
(c) in the case of any company, on a report
by the Registrar under sub-section (6), or
sub-section (7) read with sub-section (6), of
section 234.
236. Application by members to be supported
by evidence and power to call for security-An
application by members of a company under
clause (a) or (b) of section 235 shall be
supported by such evidence as the Central
Government may require for the purpose of
showing that the applicants have good reason
for requiring the investigation; and the
Central Government may, before appointing an
inspector, require the applicants to give
security, for such amount not exceeding one
thousand rupees as it may think fit, for
payment of the costs of the investigation.”
The power conferred on the Central Government under S. 235
as well as under s. 237(b) is a discretionary power whereas
the Central Government is bound to 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 the company by special
resolution or the Court by order declares that the affairs
of the company ought to be investigated by an Inspector
appointed by the Central Government [237 (a) (i) (ii) ]. It
may be noted that before the Central Government can take
action under s. 235 certain pre-conditions have to be
satisfied. In the case of an application by members of the
company under cl. (a) or (b) of S. 235, the same will have
to be supported by such evidence as the Central Government
may require for the purpose of showing that the applicants
have good reasons for requiring the investigation, and the
Central Government may, before appointing an Inspector,
require the applicant to give security for such amount not
exceeding Rs. 1,000 as it may think fit for payment of the
costs of the investigation. From the provisions contained
in ss. 235 and 236 it is clear that the legislature consid-
ered 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 s.
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 com-
119
pany may be adversely affected. It should not therefore be
ordered except on satisfactory grounds.
Before taking action under S. 237(b)(i) and (ii), the Cent-
ral Government has to form an opinion that there are circum-
stances 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.
From the facts placed before us, it is clear that the
Government had not bestowed sufficient attention to the
material before it before passing the impugned order. It
seems to have been oppressed by the opinion that it had
formed about Shri S. P. Jain. From the arguments advanced
by Mr. Attorney, it is clear that but for the association of
Mr. S. P. Jain with the appellant-company, the investigation
in question, in all probabilities would not have been
ordered. Hence, it is clear that in making the impugned
order irrelevant considerations have played an important
part.
The power under ss. 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 S. 237(b) is not the standard
required of an ordinary citizen but that of an expert. The
learned Attorney 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. This position is
also clear from the decision of this Court in Barium
Chemicals and Anr. v. Company Law Board and Anr.(1).
It was urged by Mr. Setalvad, learned Counsel for the appel-
lant that cl. (b) of S. 237 prescribes two requirements i.e.
(1) the requisite opinion of the Central Government and (2)
the existence of circumstances suggesting that the company’s
business was being conducted as laid down in sub-cl. (1) or
that the persons mentioned in sub-cl. (2) were guilty of
fraud, misfeasance or misconduct towards the company or any
of its members. According to him though the opinion to be
formed by the Central Government is subjective, the
existence of circumstances set out in cl. (b) is a condition
precedent to the formation of such opinion and therefore the
fact that the impugned order contains recitals of
(1) [1966] Supp. S.C.R.311
120
the existence of those circumstances, does not preclude the
court from going behind those recitals and determining
whether they did in fact exist and further whether the
Central Government in making that order had taken into
consideration any extraneous consideration. But according
to the learned Attorney the power conferred on the Central
Government under cl. (b) of s. 237 is a discretionary power
and the opinion formed, if in fact an opinion as required by
that section has been formed, as well as the basis on which
that opinion has been formed are not open to judicial
review. In other words according to the learned Attorney no
part of s. 237(b) is open to judicial review, the matter is
exclusively within the discretion of the Central Government
and the statement that the Central Government had formed the
required opinion is conclusive of the matter.
Courts both in this country as well as in other Commonwealth
countries had occasion to consider the scope of provisions
similar to s. 237 (b). Judicial dicta found in some of
those decisions are difficult of reconciliation.
The decision of this Court in Barium Chemicals’ case(1)
which considered the scope of s. 237(b) illustrates that
difficulty In that case Hidayatullah, J. (our present Chief
Justice) and Shelat, J. came to the conclusion that though
the power under s. 237(b) is a discretionary power the first
requirement for its exercise is the honest formation of an
opinion that the investigation is necessary and the further
requirement is that “there are circumstances suggesting” the
inference set out in the section; an action not based on
circumstances suggesting an inference of the enumerated kind
will not be valid; the formation of the opinion is
subjective but the existence of the circumstances relevant
to the inference as the sine qua non for action must be
demonstratable; if their existence is questioned, it has to
be proved at least prima facie; it is not sufficient to
assert that those circumstances exist and give no clue to
what they are, because the circumstances must be such -as to
lead to conclusions of certain definiteness; the conclusions
must relate to an intent to defraud, a fraudulent or
unlawful purpose, fraud or misconduct. In other words they
held that although the formation of opinion by the Central
Government is a purely subjective process and such an
opinion cannot be challenged in a court on the ground of
propriety, reasonableness. or sufficiency, the authority
concerned is nevertheless required to arrive at such an
opinion from circumstances suggesting the conclusion set out
in sub-cls. (i), (ii) and (iii) of S. 237(b) and the
expression “circumstances suggesting” cannot support the
construction that even the existence of circumstances is a
matter of subjective opinion. Shelat, J. further observed
that it is hard to contemplate that the Legislature could
have left to the subjective
(1) [1966] Supp. S.C.R. 311
121
process both the formation of opinion and also the existence
of circumstances on which it is to be founded; it is also
not reasonable to say that the clause permitted the
Authority to say that it has formed the opinion on
circumstances which in its opinion exist and which in its
opinion suggest an intent to defraud or a fraudulent or
unlawful purpose.
On the other hand Sarkar, C.J. and Mudholkar, J. held that
the power conferred on the Central Government under S.
237(b) is a discretionary power and no facet of that power
is open to judicial review. Our brother Bachawat, J., the
other learned Judge in that Bench did not express any
opinion on this aspect of the case. Under these
circumstances it has become necessary for us to sort out the
requirements of s. 237(b) and to see which of the two
contradictory conclusions reached in Barium Chemicals’
case(1) is in our judgment, is according to law. But before
proceeding to analyse s. 237(b) we should like to refer to
certain decisions cited at the bar bearing on the question
under consideration.
We shall first take up the decisions read to us by the
learned Attorney.
In State of Madras v. C. P. Sarathy and Another(2) this
Court was called upon to consider the scope of S. 10(1) of
the Industrial Disputes Act, 1947. There the question for
decision was whether the opinion formed by the State
Government that there existed an industrial dispute is open
to judicial review. While dealing with that question this
Court observed
“But it must be remembered that in making a
reference under S. 10(1) the Government is
doing an administrative act and the fact that
it has to form ail opinion as to the factual
existence of an industrial dispute as a
preliminary step to the discharge of its
function does not make it any the less
administrative in character. The Court,
cannot, therefore, canvass the order of
reference closely to see if there was any
material before the Government to support its
conclusion, as if it was a judicial or quasi-
judicial determination no doubt, it Will be
open to a party seeking to impugn the
resulting award to show that what was referred
by the Government was not an industrial
dispute within the meaning of the Act, and
that, therefore, the Tribunal had no
jurisdiction to make the award. But, if the
dispute was an industrial dispute as defined
in the Act, its factual existence and the
expediency of making a reference in the
circumstances of a particular case are matters
entirely for the Government to decide
upon,
(1) [1966] Supp. S.C.R. 31 1.
7Sup.CI/69-9
(2) [1953] S.C.R. 334
122
and it will not be competent for the Court to
hold the reference bad and quash the
proceedings for want of jurisdiction merely
because there was, in its opinion, no material
before the Government on which it could have
come to an affirmative conclusion on those
matters.”
This interpretation of s. 10(1) is based on the language of
that provision as well as the purpose for which the power in
question was given and the effect of a reference. That
decision cannot be considered as an authority for the
proposition that whenever a provision of law confers certain
power on an authority on its forming a certain opinion on
the basis of certain facts the courts are precluded from
examining whether the relevant facts on the basis of which
the opinion is said to have been formed had in fact existed.
Reliance was next placed on the decision of this Court in
Joseph Kuruvilla Vellukunnel v. The Reserve Bank of India
and Ors.(1) wherein this Court was called upon to examine
the vires -of s. 3 8 ( 1 ) and 3 (b) (iii) of the Banking
Companies Act, 1949. Kapur, and Shah, JJ. held that the
provisions in question are ultra vires the Constitution as
the power conferred on the Reserve Bank is an arbitrary,
power whereas the majority consisting of Sinha, C.J.,
Hidayatullah and Mudholkar, JJ. upheld the validity of the
provisions on the ground that the power conferred on the
Reserve Bank is a reasonable restraint taking into
consideration the interests of the public and the position
occupied by the Reserve Bank in the financial system of this
country We do not think that this decision bears on the
point under consideration.
In Hubli Electricity Company Ltd. v. Province of Bombay(2)
the Judicial Committee came to the conclusion that the
opinion to be formed by the Provincial Government under s.
4(1) of the Indian Electricity Act, 1910 is a subjective
opinion and the same ,cannot be adjudged by applying
objective tests. The relevant portion of section 4(1) reads
:
“The Provincial Government may, if in its
opinion the public interest so requires,
revoke a licence in any of the following
cases, namely —
(a) where the licensee in the opinion of the
Provincial Government makes wilful and
unreasonably prolonged default in doing
anything required of him by or under this
Act. . . . ”
Dealing with the scope of that provision their
Lordships observed
“Their Lordships are unable to see that there
is any-
thing in the language of the sub-section or in
the subject
(1) [1962] Supp.3,S.C.R.632.
(2) L.R. (1948-49) 76. I.A. 57.
matter to which it relates on which to found
the suggestion that the opinion of the
Government is to be subject to objective
tests. In terms the relevant matter is the
opinion of the government–not the grounds on
which the opinion is based. The language
leaves no room for the relevance of a judicial
examination as to the sufficiency of the
grounds on which the government acted in
forming an opinion. Further the question on
which the opinion of the government is
relevant is not whether a default has been
wilful and unreasonably prolonged but whether
there has been a wilful and unreasonably pro-
longed default. On that point the opinion is
the determining matter, and-if it is not for
good cause displaced as a relevant opinion-it
is conclusive.”
It may be remembered that therein the, Judicial Committee
was considering a pre-constitutional provision which was not
subject to the mandate of Art. 1 9 (1) (g). Further their
Lordships were careful enough to observe :
“that they are unable to see that there is
anything in the language of the sub-section or
in the subject matter to which it relates on
which to found the suggestion that the opinion
of the government is to be subject to objec-
tive tests.”
In other words in their Lordship’s opinion the subject
matter of a legislation has an important bearing in the
interpretation of a provision. We may also add that s. 4(1)
of the Electricity Act 1910 stood by itself and in finding
out its scope no assistance could have been taken from any
other provision in that Act.
In Rabinson v. Minister of Town and Country Planning(1) the
declaratory order made by the Minister that he was satisfied
that the area comprised in the order should be ‘laid out
afresh and re-developed as a whole’ was held not open to
judicial review. The order in question to an extent
depended on questions of policy. It is not open for courts
to decide questions of policy.
In Point of Ayr Collieries Ltd. v. Lloyd George(2) the Court
of -Appeal upheld the contention that – the order made by
the Minister of Fuel and Power under the defence (General)
Regulations No. 55 (4) assuming the management of an
undertaking was not open to judicial review. In arriving at
the decision it is clear that the court was influenced by
the decision of the House of Lords in Liversidge v.
Anderson(,’) and Greene v. Home Secretary (4 ) which
considered the validity of detentions during war time. The
decisions cannot serve as real guide for interpreting the
provision of law with which we are concerned.
(1) [1947] 1 K.B. 702. (3) [1941] 3 All E.R. 338.
(2) [1943] 2 All E.R. 546. (4) [1941] 3 All E.R. 388.
124
We shall now refer to the decisions relied on by the appel-
lant.
As long back as 1891 the House of Lords was called upon to
consider the scope of some of the provisions of the
Licensing Act 1872 which gave discretion to the Magistrates
in granting certain licenses. The question for decision was
as to the nature of the discretion granted. Lord Halsbury
L. C. speaking for the House observed, in Susannah Sharp v.
Wakefield and Ors. (1).
” ‘discretion’ means when it is said that
something is to be done within the discretion
of the authorities that that something is to
be done according to the rules of reason and
justice, not according to private opinion :
Rooke’s case; according to law, and not
humour. It is to be, not arbitrary, vague and
fanciful, but legal and regular.”
In Nakkuda Ali v. M. F. De S. Jayaratna(2) the Judicial Com-
mittee in interpreting the words “where the Controller has
reasonable grounds to believe that any dealer is unfit to be
allowed to continue as a dealer” found in Regulation 62 of
the Defence (Control of Textiles) Regulations, 1945 observed
:
“After all, words such as these are commonly
found when a legislature or law-making
authority confers powers on a minister or
official. However read, they must be intended
to serve in some sense as a condition limiting
the exercise of an otherwise arbitrary power.
But if the question whether the condition has
been satisfied is to be conclusively decided
by the man who wields the power the value of
the intended restraint is in effect nothing.
No doubt he must not exercise the power in bad
faith : but the field in which this kind of
question arises is such that the reservation
for the case of bad faith is hardly more than
a formality. Their Lordships therefore treat
the words in reg. 62, ‘where the Controller
has reasonable grounds to believe that any
dealer is unfit to be allowed to continue as a
dealer’ as imposing a condition that there
must in fact exist such reasonable grounds,
known to the Controller before he can validly
exercise the power of cancellation.”
The decision of the House of Lords in Padfield and Ors. v.
Minister of Agriculture, Fisheries and Food and Ors.(3) is
of considerable importance. Therein the material facts are
these :
The appellants in that appeal, members of the south east
regional committee of the Milk Marketing Board, made a com-
(3) [1968] 1 All E.R. 694.
125
plaint to the Minister of Agriculture, Fisheries and Food,
pursuant to S. 19(3) of the Agricultural Marketing Act,
1958, asking that the complaint be referred to the committee
of investigation established under that enactment. The
complaint was that the board’s terms and prices for the sale
of milk to the board did not take fully into account
variations between producers and the cost of bringing milk
to a liquid market. In effect the complaint was that the
price differential worked unfairly against the producers in
the popular south east region, where milk was more valuable,
the cost of transport was less and the price of land was
higher. There had been many previous requests to the board,
but these had failed to get the board, in which the south
east producers were in a minority, to do anything about the
matter. The Minister declined to refer the-matter to the
committee. By letters of May 1, 1964 and March 23, 1965, he
gave reasons which included that (in effect) his main duty
had been to decide the suitability of the complaint for such
investigation but that it was one which raised wide issues
and which he did not consider suitable for such investi-
gation, as it could be settled through arrangements
available to producers and the board within the milk
marketing scheme; that he had unfettered discretion, and
that, if the complaint were upheld by the committee, he
might be expected to make a statutory order to give effect
to the committee’s recommendations. Section 19(3) (b) of
the Agricultural Marketing Act, 1958 read
“A committee of investigation shall be charged
with the duty, if the Minister in any case so
directs, of considering, and reporting to the
Minister, on any report made by the consumers’
committee and any complaint made to the
Minister as to the operation of any scheme
which, in the opinion of the Minister, could
not be considered by a consumers’ committee
under the last foregoing subsection.”
The appeal was allowed by the House of Lords (Lord Morris of
Borth-Y-Gest dissenting). Lord Reid and Lord Pearce held
that where a statute conferring a discretion on a Minister
to exercise or not to exercise a power did not expressly
limit or define the extent of his discretion and did not
require him to give reasons for declining to exercise the
power, his discretion might nevertheless be limited to the
extent that it must not be so used, whether by reason of
misconstruction of the statute or other reason, as to
frustrate the object of the statute which conferred it.
Lord Hodson and Lord Upjohn held that although the Minister
had full or unfettered discretion under s. 19(3) of the
Agricultural Marketing Act, 1958, he was bound to exercise
it lawfully viz. not to misdirect himself in law, nor to
take into account irrelevant matters, nor to omit relevant
matters from consideration.
126
In the course of his speech Lord Hodson made
the following observations :
“If the Minister has a complete discretion
under the Act of 1958, as in my opinion, he
has, the only question remaining is whether he
has exercised it lawfully. It is on this
issue that much difference of Judicial opinion
has emerged, although there is no divergence
of opinion on the relevant law. As Lord
Denning M.R. said citing Lord Greene M.R. in
Associated Provincial Picture Houses Ltd. v.
Wednesbury Corpn. (1).
” a person entrusted with a discretion must
direct himself properly in law. He must call
his own attention to the matters which he is
bound to consider. He must exclude from his
consideration matters which are irrelevant to
the -matter that he has to consider’
Lord Pearce in his speech observed :
“If all the prima facie reasons seem to point
in favour of his taking a certain course to
carry out the intentions of Parliament in
respect of a power which it has given him in
that regard, and he gives no reason whatever
for taking a contrary course, the court may
infer that he has no good reasons and that he
is not using the power given by Parliament to
carry out its intentions. In the present case
however the Minister has given reasons which
show that he was not exercising his discretion
in accordance with the intentions of the Act
of 1958.
In the present case it is clear that
Parliament attached considerable importance to
the independent committee of investigation as
a means to censure that injustices were not
caused by the operation of a compulsory
scheme.”
Lord Upjohn observed
“My Lords, on the basic principles of law to
be applied there was no real difference of
opinion, the great question being how they
should be applied to this case. The Minister
in exercising his powers and duties conferred
on him by statute can only be controlled by a
prerogative order which will only issue if he
acts unlawfully. Unlawful behaviour by the
Minister may be stated with sufficient
accuracy for the purposes of the present
appeal (and here I adopt the classification of
Lord Parker C.J. in the divisional court): (a)
by an
(1) [1947] 2, All E.R. 682.
127
outright refusal to consider the relevant
matter; or (b) by misdirecting himself in
point of law, or (c) by taking into account
some wholly irrelevant or extraneous con-
sideration, or (d) by wholly omitting to take
into account a relevant consideration. There
is ample authority for these propositions
which were not challenged in argument. In
practice they merge into one another and
ultimately it becomes a question whether for
one reason or another the Minister has acted
unlawfully in the sense of misdirecting
himself in law, that is, not merely in respect
of some point of law but by failing to observe
the other headings which I have mentioned.”
In Commissioners of Customs and Excise v. Cure and Deeley
Ltd.(1) the power given to the Commissioners under S. 33(1)
of the Finance Act, 1940 “to make regulations providing for
any matter for which provision appears to them to be
necessary for the purpose of giving effect to the provisions
of this Part of the Act and of enabling them to discharge
their functions thereunder . . . . . . ” was held not to
make that authority the sole judge of what its powers were
as well as the sole judge of the way in which it could
exercise such powers as it might have. Sachs, J. who spoke
for the Court observed the legal position thus :
“In the first place I reject the view that
the words appear to them to be necessary’ when
used in a statute conferring powers on a
competent authority, necessarily make that
authority the sole judge of what are its
powers as well as the sole judge of the way in
which it can exercise such powers as it may
have. It is axiomatic that, to follow the
words used by Lord Radcliffe in the Canadian
case ‘the paramount rule remains that every
statute is to be expounded according to its
manifest or expressed intention’. It is no
less axiomatic that the application of that
rule may result in phrases identical in
wording or in substance receiving quite
different interpretations according to the
tenor of the legislation under consideration.
As an apt illustration of such a result it is
not necessary to go further than Liversidge v.
Anderson(2) and Nakkuda Ali v. Jayaratne(3)
which cases the words ‘reasonable cause to
believe’ and ‘reasonable grounds to believe’
received quite different interpretations.
To my mind a court is bound before reaching a
decision on the question whether a regulation
is intra vires to examine the nature, objects,
and scheme of the
(1) [1962] 1 Q.B. 340.
(3) [1951] A.C.66.
(2) [1942] A.C. 206
128
.lm15
piece of legislation as a whole and in the light of that
examination to consider exactly what is the area over which
powers art given by the section under which the competent
authority is purporting to act.”
In Roncarelli v. Duplessis(1), while dealing with the
discretionary power of the Quebec Liquor Commission to
cancel a liquor licence this is what Rand, J. observed :
“A decision to deny or cancel such a privilege lies within
the ‘discretion’ of the Commission; but that means that
decision is to be based upon a weighing of considerations
pertinent to the object of the administration.
In public regulation of this sort there is no such thing as
absolute and untrammeled ‘discretion’ that is that action
can be taken on any ground or for any reason that can be
suggested to mind of the administrator; no legislative Act
can, without express language, be taken to contemplate an
unlimited arbitrary power exercisable for any purpose,
however capricious or irrelevant, regardless of the nature
or purpose of the statute. Fraud and corruption in the
Commission may not be mentioned in such statutes but they
are always implied as exceptions. ‘Discretion’ necessarily
implies good faith in discharging public duty; there is al-
ways a perspective within which a statute is intended to
operate; and any clear departure from its lines or objects
is just as objectionable as fraud or corruption. Could an
applicant be refused a permit because he had been born in
another province, or because of the colour of his hair? The
ordinary language of the legislature cannot be so
distorted.”
In particular we would like to emphasize the observation
that “there is always a perspective within which a statute
is intended to operate”.
In Read v. Smith (2) it was held that the Governor-General’s
power under the-Education Act to make such regulations as he
“thinks necessary to secure the due administration” of the
Act has been held invalidly exercised in so far as his
opinion as to the necessity for such regulation was not
reasonably tenable.
Coming back to s. 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 ss. 235 and 236. In finding out the
legislative intent we
(1) [1959] S.C.R. (Canada Law Reports) 121.
(2) [1959] New Zealand Law Reports 996.
129
cannot ignore the requirements of those sections. ln
interpreting S. 237(b) we cannot ignore the adverse effect
of the investigation on the company. Finally we must also
remember that the section in question is an inroad on the
powers of the company to carry on its trade or business and
thereby an infraction of the fundamental right guaranteed to
its shareholders under Art. 1 9 (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 majority of the Judges
constituting the Bench in Barium Chemicals’ case(1)
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 im-
posed by law. For the reasons stated earlier we agree with
the conclusion reached by Hidayatullah, and Shelat, JJ. in
Barium Chemicals'(1) case that the existence of
circumstances suggesting that the company’s business was
being conducted as laid down in sub-cl.(1) or the persons
mentioned in sub-cl.(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.
Next question is whether any reasonable authority much less
expert body like the Central Government could have
reasonably made the impugned order on the basis of the
material before it. Admittedly the only relevant material
on the basis of which the impugned order can be said to have
been made is the transaction of sale of preference shares of
Albion Plywoods Ltd. At the time when the Government made
the impugned order, it did not know the market quotation for
the ordinary share of that company as on the date of the
sale of those shares or immediately before that date. They
did not care to find out that information. Hence there was
no material before them showing that they were sold for
inadequate consideration. If as is now proved that the
market price of those shares on or about May 6, 1960 was
only Rs. 11 per share then the transaction in question
could not have afforded any basis for forming the opinion
required by S. 237(b). If the market price of an ordinary
share of that company on or about May 6, 1960 was only Rs. 1
1 it was quite reasonable for the Directors to conclude that
the price of the ordinary shares is likely to go down in
view of the company’s proposal to put on the mar-
(1) [1966] Supp. S.C.R. 311.
130
ket another 50,000 shares as a result of the conversion of
the preference shares into ordinary shares. We do not think
that any reasonable person much less any expert body like
the Government, on the material before it, could have jumped
to the conclusion that there was any fraud involved in the
sale of the shares in question. If the Government had any
suspicion about that transaction it should have probed into
the matter further before directing any investigation. We
are convinced that the precipitate, action taken by the
Government was not called for nor could be justified-on the
basis of the material before it. The opinion formed by the
Government was a wholly irrational opinion. The fact that
one of the leading Directors of the appellant company was a
suspect in the eye of the Government because of his
antecedents, assuming without deciding, that the allegations
against him are true, was not a relevant circumstance. That
circumstance should not have been allowed to cloud the
opinion of the Government. The Government is charged with
the responsibility to form a bona fide opinion on the basis
of relevant material. The opinion formed in this case
cannot be held to have been formed in accordance with law.
In the result we allow these appeals and set aside the
impugned order. The respondents shall pay the costs of the
appellant both in this Court as well as in the High Court
(Hearing fee one set).
Bachawat, J. The Central Government is authorized to appoint
an inspector to investigate the affairs of a company under
s. 235 clauses (a) and (b) of the Companies Act, 1956 on the
applications of its members, under s. 235 clause (a) on the
report of the Registrar, under s. 237 clause (a) sub-clause
(i) if required by a special resolution of the company,
under s. 237 clause (a) sub-clause (ii) if directed by the
court and under s. 237 clause (b) if the Government is of
the opinion that there -are circumstances suggesting
malpractices in relation to the company’s affairs. The
investigation is mandatory under s. 235 clause (a) if it is
required by the company’s special resolution, see R. v.
Board of Trade Exp. St. Martin Preserving Co. Ltd.(2) or if
the Court so directs. The Court has a discretion to direct
the investigation on being satisfied that the affairs of the
company should be investigated, Re Miles Aircrafts Ltd.,
(No. 2)(2). The investigation is a fact finding inquiry and
its object is to ascertain whether in fact malpractices have
been committed in relation to the company’s affairs, see
Raja Narayanlal Bansilal v. Manak Phiroz Mistry & Anr.(3).
On a consideration of the inspector’s report, the Government
can take appropriate action against the delinquents under
ss. 242, 243 and 244.
[1955] 1 Q.B,693,515. (2) [1948] W.N.178.
(3) [1961] 1 S.C.R.417,430-6.
131
Section 237(b) provides that the Central Government may
appoint one or more competent persons as inspectors to
investigate the affairs of the company and to report thereon
in such manner as the Central Government may direct, “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 member;
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.”
The conditions for the exercise of the statutory power are
clearly stated in s. 237(b). It is well to bear in mind,
firstly, that: v. 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., and 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 s. 237(b) must be exer-
cised. 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 re-
quisite opinion on the ground that the director in 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 s. 237(b) made the
opinion, conclusive, it might be open to challenge as
violative of Arts. 14 and 19 of’
132
the Constitution, see : Corporation of Calcutta v. Calcutta
Tramways Co. Ltd.,(1) distinguishing Joseph Kuruville
Veilukunnel v. The Reserve Bank of India(2). Section 237(b)
is not violative ,of Arts. 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
s. 23 7 (b) is not fulfilled. On this ground I interfered
with the order under s. 237 (b) in Barium Chemicals v.
Company Law Board(3).
Let me recall the words of s. 237(b) : “If, in the opinion
of the Central Government, there are circumstances
suggesting…… The relevant matter is “the opinion of the
Central Government”. The condition precedent to the
exercise of power under S. 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. Section 237(b) must be interpreted in the light of
its own language and subject-matter. We miss its real
import if we begin by referring to the construction put by
other judges on other statutes perhaps similar but not the
same. The decisions are useful when they lay down
principles of interpretation or give the meaning of the
words which have become terms of art.
The decided cases show that normally, if the opinion of an
administrative agency is the condition precedent to the
exercise ,of the power, the relevant matter is the opinion
of the agency and -not the grounds on which the opinion is
founded. In Hubli Electricity Company v. Province of
Bombay(4) the Privy Council had occasion to construe S. 4(1)
(a) of the Indian Electricity Act (TX of 1910) which read :
“The Provincial Government may, if in its opinion the public
interest so requires, revoke a licence in any of the
following cases, namely,
(a) where the licensee in the opinion of the Provincial
Government makes wilful and unreasonably prolonged default
in doing anything required of him by or under this Act.”
The Government acting under S. 4(1)(a) revoked the licence.
The licensee filed a suit for a declaration that the order
was invalid. The Government pleaded that it had formed the
opinion as mentioned in S. 4 (1 ) (a), and contended that on
the true construction of the Act the Court was not entitled
to go behind its
(1) [1964] 5S.C.R.25.
(3) [1966] ‘Supp. S.C.R. 311, 343.
(2) [1962] Supp. 3 S.C.R. 632.
(4) L.R.76 I.A. 57.
133
opinion. The appellant submitted that the opinion referred
to in s. 4(1) (a) was not the subjective opinion of the
Government but an opinion subject to objective, tests.
Lord Uthwatt said .-
“Their Lordships now turn to the question of
construction of s. 4, sub-s. 1 (a). Their
Lordships are unable to see that there is
anything in the language of the sub-section or
in the subject-matter to which it relates on
which to found the suggestion that the opinion
of the Government is to be subject to
objective tests. In terms the relevant matter
is the opinion of the Government not the
grounds on which the opinion is based. The
language leaves no -room for the relevance of
a judicial examination as to the sufficiency
of the grounds on which the Government acted
in forming an opinion. Further, the question
on which the opinion of the Government is
relevant is not whether a default has been
wilful and unreasonably prolonged but whether
there has been a wilful -and unreasonably
prolonged default. On that point the opinion
is the determining matter, -and-if it is not
for good cause displaced as a relevant
opinion-it is conclusive.”
The opinion is displaced as a relevant opinion if it could
not be formed by any sensible person on the material before
him. The reason is that the Court may then infer that the
authority either did not honestly form the opinion or that
in forming it, it did not apply its mind to the relevant
facts. In Ross-Clunis V. Papadopoullos & Ors.(1) the
commissioner of Limassol imposed a fine on the Greek Cypriot
inhabitants in the area after holding an inquiry under
regulation 5 of the Cyprus Emergency Powers (Collective
Punishment) Regulations, 1955 which provided that “in
holding inquiries under these regulations, the commissioner
shall satisfy himself that the inhabitants of the said area
are given adequate opportunity of understanding the subject-
matter of the inquiry and making representations thereon.”
The Privy Council upheld the commissioner’s order and set
aside the order, of certiorari quashing it. With regard to
the contention of the commissioner that the only duty cast
on him was to satisfy himself of those facts, that the test
was a subjective one and that in the absence of bad faith
his statement that he was so satisfied was a complete answer
to the argument that he had failed to comply with reg. 5.
Lord Morton said :-“Their Lordships feel the force of this
argument, but they think that if it could be shown there
were no grounds on which the appellant could be satisfied, a
court might infer either that he did not honestly form that
view or that, in forming it, he could not have applied his
mind to the
(1) [1958] 2 All E.R. 23.
134
relevant facts. In the present case, however, there were
ample grounds on which -the appellant could feel ‘satisfied’
of the matters mentioned in reg. 5 (2)” see -also : State of
Maharashtra v. B. K.Takkamore(1).
The other decisions cited at the bar are not helpful on the
construction of s. 237(b). In construing statutory
provisions of this description, the actual words used and
their subject-matter are of the utmost importance. Thus if
the statute provides that “if in the opinion of the
Provincial Government it is necessary or expedient to do so
the Provincial Government may, by order in writing
requisition any land for any public purpose”, the existence
of the public purpose but not its necessity or expediency is
justiciable, see : Province of Bombay v. K. S. Advani(2).
The reason is that the factual existence of the public
purpose is by the language of the section a condition
precedent of the requisition; and now in view of Art. 31(2)
of the Constitution, this is a constitutional requirement
irrespective of the language of the section. Where the
statute authorises the executive action “if AB has
reasonable grounds to believe” the certain circumstance or
thing, it means what it says. AB must in fact have
reasonable grounds for believing a circumstance or a thing,
see : Nakkuda Ali v. M. F. De S. Jawaratne(3). But in an
emergency legislation, such a phrase was construed to impose
only the condition that AB honestly thought he had
reasonable grounds for belief, see : Liversidge v. Sir John
Anderson(4) but such a construction need not invariably be
given, see King Emperor v. Vimlabai(5). In Carltona Ltd. v.
Commissioner of Works(6) the Court held -that an emergency
legislation authorising requisition of premises, “if it
appears to that authority to be necessary or expedient so to
do in the interest of public safety, etc.”, the court could
not investigate the grounds or reasonableness of the
decision in the absence of an allegation of bad faith.
These decisions on emergency legislation stand on a peculiar
footing. ‘Me courts are not inclined to fetter executive
action when the country is being raided by the enemy. They
show that the subject-matter of the statute has a material
bearing on its construction. To give another example, the
courts are not inclined to interfere with orders of
reference of industrial disputes, see : State of Madras v.
C. p. Sarathy and another(7). Swadeshi Cotton Mills Co. Ltd.
v. State of U.P. & Ors. (8) but even such orders -are not
immune from judicial review, see State of Bombay v. K. P.
Krishnan & Ors.
(1) [1967] 2S.C.R.583,585,588.(2) [1950] S.C.R.621.
(3) [1951] A.C.66,77. (4) [1942] A.C. 206.
(5) L.R. 73. I.A. 144. (6) [1943] All E.R. 560.
(7) [1953] S.C.R. 334, 346-47.(8) [1962] 1 S.C.R. 422.
(9) [1961] 1 S.C.R. 227.
135
Let us now turn to the facts of the present case. The
Central Government passed the impugned order under S. 237
(b) on April 11, 1963. The order recited
“Whereas the Central Government is of the opinion that there
are circumstances suggesting that the business of Rohtas
Industries Limited,, a company having its registered office
at Dalmianagar, Bihar, (hereinafter referred to as the said
company) is being conducted with intent to defraud its
creditors, members or other persons and the persons
concerned in the management of its affairs have in
connection therewith been guilty of fraud, misfeasance, or
other misconduct towards the said company or its members.”
The order then stated that in exercise of the powers
conferred by s. 237 (b) sub-clauses (i) and (ii) of the
Companies Act, 1956 the Central Government appointed Shri S.
Prakash Chopra as inspector to investigate the affairs of
the said company for the period April 1, 1958 up to date and
should he consider it necessary also for the period prior
to April 1, 1958.
Learned Attorney-General conceded that the affidavit of R.
C. Dutt affirmed on August 25, 1965 and the further
affidavit of Sisir Kumar Datta on October 4, 1968 pursuant
to the order of this Court dated September 9, 1968 disclosed
all the materials which were before the Central Government
when it passed the order dated April 11, 1963. He further
conceded that the only circumstance suggesting fraud etc.,
in relation to the company’s affairs after April 1, 1958 was
the transaction relating to 3,000 preference shares in
Albion Plywoods Ltd., on May 6, 1960 and that but for this
transaction the Government would not have passed the
impugned order. The materials before the Government with
regard to the transaction were as follows : Albion Plywoods
Ltd., had issued 50,000 ordinary shares of Rs. 10 and 5,000
5-1/2% cumulative redeemable preference shares of Rs. 100.
2,000 preference shares were held by New Central Jute Mills
Company Ltd., and 2,000 preference shares were held by
Rohtas Industries Ltd. New Central Jute Mills Co. Ltd. and
the Rohtas Industries Ltd., were both controlled by the Sahu
Jains or Sri S. P. Jain. The preference shares were
redeemable at the option of the Albion Plywoods Ltd., at any
time after 10 years from the date of their issue on
September 7, 1957. In April 1960 New Central Jute Mills
Co., Ltd., sold 2,000 preference shares held by it to M/s.
Bagla & Co., and M/s. Poddar Sons at Rs. 100 per share
against cash payment. On May 6, 1950 Rohtas Industries
Ltd., sold 3,000 preference shares held by it to M/s. Bagla
& Co., at Rs. 100 per share. On the dates when the sales
were effected the management of New Central Jute Mills Co.
Ltd., and Rohtas Industries Ltd., knew that the preference
shares would be converted into ordinary shares. As a matter
of fact Albion Plywoods Ltd., by a special resolution passed
on May 20, 1960 converted 5,000
136
preference shares into 50,000 ordinary shares and M/s. Sahu
Jains were appointed as its managing agents. The market
price of an ordinary share as shown in the Indian Finance
was Rs. 14 on May 13, 1960, Rs. 15-44 on May 20, 1960, Rs.
17 on May 27, 1960, Rs. 17 on June 10, 1960 and Rs. 14 on
June 17, 1960. The charge is that the management of Rohtas
Industries Ltd., sold the preference shares at an under
value with a view to benefit the managing agents, their
friends and brokers knowing fully well that on conversion
into ordinary shares they would fetch a much higher price.
The charge was originally made with regard to the sale of
2,000 preference shares held by New Central Jute Mills Co.
Ltd., in a letter dated January 27, 1961 addressed by a com-
plainant to the Secretary to the Government of India,
department of company law administration. In course of
investigation into this charge, the regional director,
company law administration, Calcutta, discovered that Rohtas
Industries Ltd., also had sold 3,000 preference shares to
M/s. Bagla & Co., on May 6, 1960. The annual return filed
by Albion Plywoods Ltd., on May 30, 1960 showed that 32,000
ordinary shares in the company were then held by the members
of the Bagla family. These materials are to be found in the
complaint dated January 27, 1961 with regard to the sale of
2,000 preference shares by New Central Jute Mills Co. Ltd.,
and the correspondence passed between the Secretary to the
Government of India, ministry of commerce and industry,
department of company law administration, New Delhi and the
regional director, company law administration, Calcutta. On
the subject of the sale of preference shares there was no
other material before the Government when it passed the
order dated April 11, 1963.
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.
There was no material before the Central Government
suggesting that M/s. Bagla & Co., held the preference
shares as benamidars of M/s. Sahu Jains or their friends.
On May 30, 1960 M/s. Bagla & Co., continued to hold 32,000
ordinary shares in Albion Plywoods Ltd. it is not suggested
that the market price of preference shares on May 6, 1960
was more than Rs. 100. The market price of the ordinary
shares fluctuated between Rs. 14 and Rs. 17 between May 13
and June 17, 1960. But there was no material showing that
the huge block of 50,000 ordinary shares issuable on
conversion of 5,000 preference shares could be sold in the
market for more than Rs. 10 per share. No attempt was made
to find out the market price of ordinary shares on May 6,
1960. It now transpires that on that date the price was Rs.
11. The charge that the sale of the Preference shares was
fraudulent or improper was not corn-
137
municated to the Rohtas Industries Ltd., nor were they asked
to give their explanation on the subject.
I think it is a border line case. The Court has no power to
review the facts as an appellate body nor can it substitute
its opinion for that of the Government. But the curious
feature of the case is that on reading the affidavits we are
left with the impression that the Government did not rely on
the transaction relating to the sale of 3,000 preference
shares of Albion Plywoods Ltd., as suggesting fraud. It
appears that the Government passed an order under S. 237(b)
appointing an inspector to investigate the affairs of New
Central Jute Mills Co. Ltd. but it seems that the Government
did not rely on the sale of 2,000 preference shares by the
management of this company as a relevant material for
passing the order, see the report of New Central Jute Mills
v. Finance Ministry(1) at pages 160-1. On the whole, I am
inclined to think that there was no material before the
Government on which it could form the opinion that there
were circumstances suggesting fraud etc., as mentioned in
the impugned order dated April 11, 1963. 1 -am, therefore,
constrained to hold that it formed the opinion without
applying its mind to the materials before it. The opinion
so formed is in excess of its powers and cannot support the
order under S. 237(b).
In the result, I agree to the order proposed by Hegde, J.
V.P.S. Appeals allowed..
(1) A.I.R. 1966 Cal. 151.
7 Sup C1169-10
138

 

 

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