Companies Act Case Law Sri Ramdas Motor Transport Ltd And Ors Vs Tadi Adhinarayana Reddy And Ors

CASE NO.:
Appeal (civil) 3155 of 1997

PETITIONER:
SRI RAMDAS MOTOR TRANSPORT LTD. AND ORS.

RESPONDENT:
TADI ADHINARAYANA REDDY AND ORS.

DATE OF JUDGMENT: 01/05/1997

BENCH:
K.S. PARIPOORNAN & SUJATA V. MANOHAR

JUDGMENT:
JUDGMENT

1997 (3) SCR 1160

The Judgment of the Court was delivered by

MRS. SUJATA V. MANOHAR, J. Leave granted.

The first appellant company was established in 1944 as a private limited
company under the Companies Act, 1913. It continued as a private limited
company under the Companies Act, 1956. However, with effect from 1.2.1975,
by virtue of Section 43-A of the Companies Act, 1956, it became a public
limited company in view of the fact that the annual turn-over of the
company was above the prescribed limit. The first appellant company,
however, continues to be a closely held company consisting of only 61
shareholders including 11 employees and ex-employees, The second appellant
is the Chairman and Managing Director of the first appellant company. The
third appellant is the Joint Managing Director of the first appellant
company. The main object of the company is to carry on the business of
parcel lorry service, manufacture of automobile components and dealership
of Telco.

It is the case of the appellants that there were disputes between the
Managing Director i.e. second appellant, and his son-in-law, Srihari Rao,
who was a former Director of the first appellant company and a former
Member of Parliament. The disputes started some time in 1993. In 1994,
(according to the appellants, at the instigation of Srihari Rao) eight
shareholders of the company filed before the Company Law Board, Principal
Bench, New Delhi, a company petition being C.P. No. 7 of 1994 under
Sections 397 and 398 of the Companies Act, 1956, on the ground of
oppression of minority shareholders and mismanagement of the affairs of the
company by the second and third appellants. In the said petition an
injunction was sought to restrain the first appellant company from
proceeding with the Rights Issue of its shares. After hearing both the
parties, however, the Company Law Board declined to grant any interim order
to this effect. The Company Law Board directed the company to file an
affidavit with regard to the Rights Issue and to follow the procedure which
it had followed earlier for the Rights Issue.

Thereafter, Srihari Rao and some others filed before the Company Law Board
another Company Petition No. 15 of 1994 under Sections 397 and 398 of the
Companies Act, 1956 on the ground of oppression of minority shareholders
and mismanagement of the affairs of the company by the second and third
appellants. This petition was filed on 7th April,

1994. An interim relief was sought from the Company Law Board for
supercession of the Board of Directors of the first appellant-company and
for re-constitution of the Board of Directors. An interim injunction was
also sought against appellants 2 and 3 to restrain them from functioning as
Managing Director and Joint Managing Director of the first appellant-
company. The company petition was listed for hearing on 20th March,

1995. It was adjourned at the request of the petitioners therein and
thereafter from time to time. The petitioners before the Company Law Board
filed an application to receive evidence by affidavit. This application was
rejected by the Company Law Board on 17th June, 1995. The main petition was
thereafter heard from 16th of October 1995 onwards.

On 12th of January, 19% Shrihari Rao filed another company application for
appointment of an administrator. During the hearing of this application,
the petitioners in the said petition took further time for filing a better
affidavit in support of their application and the application was adjourned
to 4th December, 1996. The hearing of the main company petition was
adjourned to May, 1997 at the instance of the petitioners therein. We have
set out these facts as the grievance of the 1st respondent in his writ
petition is : Company Law Board has failed to pass an order.

During the pendency of all these proceedings before the Company Law Board,
on 5.10.1996 the 1st respondent filed a writ petition under Article 226 of
the Constitution before the High Court of Andhra Pradesh for a writ of
mandamus directing Union of India and the Secretary (Finance), Union of
India (respondents 1 and 2 in the writ petition) to forthwith prosecute the
present appellants 2 and 3 in accordance with law. The 1st respondent has
challenged in the writ petition various transactions entered into by the
first appellant company relating to purchases and sales. The 1st respondent
has also challenged the correctness of the figures shown in the balance-
sheet and profit and loss accounts of the first appellant-company.
According to the 1st respondent there was misappropriation of the funds of
the company by appellants 2 and 3. It was claimed by the first respondent
that this amounts to misappropriation of public funds and that, for the
alleged acts of appellants 2 and 3, the Union of India should be directed
to prosecute appellants 2 and 3. There is a further prayer in the writ
petition that the court should direct an inquiry by the Central Bureau of
Investigation into the alleged financial mismanagement of the company and
misappropriation of funds by appellants 2 and 3; that a report should be
submitted to the Court within four weeks pending the disposal of the writ
petition; and on the basis of such report the Court should give further
directions. There is also a prayer for the appointment of an interim
administrator to take charge of the affairs of the first appellant-company.
All these prayers relate to the alleged mismanagement of the affairs of the
first appellant-company by appellants 2 and 3. In essence, the writ
petition under Article 226 prays for an investigation into the affairs of
the first appellant-company, and for action against appellants 2 and 3. The
interim prayer for an administrator of the company also clearly shows that
the main grievance of the first respondent in the writ petition relates to
the manage-ment of the affairs of the first appellant-company.

The Companies Act, 1956 provides for dealing with such grievances against a
company and its Board of Directors. Under Section 235 of the Companies Act,
1956 the Central Government may, where a report has been made by the
Registrar under Section 234(6) or (7), 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. Section 234(6)
requires the Registrar, in cases where he is of the view, on the basis of
information or explanation furnished by the company, or on the basis of the
books and papers produced, that the documents together with information and
explanation disclose an unsatisfactory state of affairs, or do not disclose
a full and fair statement of any matter to which the documents purport to
relate, to report in writing the circumstances of the case to the Central
Government. Sub-section 7 deals with the Registrar acting on the basis of
material placed before him by any contributory or creditor or any other
person interested in the business of the company. The Registrar, if he is
satisfied that the business of the company is being carried on in fraud of
its creditors or persons dealing with the company, or otherwise for a
fraudulent or unlawful purpose, may, after giving an oppor-tunity of
hearing to the company, by written order call upon the company to furnish
in writing any information or explanation in connection with it. If he is
satisfied that investigation is required, he may refer the case to the
Central Government. Whereupon the Central Government could order an
investigation under Section 235. The Central Government, therefore, will
not readily order an investigation into the affairs of the company unless
the Registrar makes a report as set out in Section 235(1) read with Section
234(6) and (7).

Under Section 235(2) a power is given to the Company Law Board in case
where, inter alia an application is received from not less than 200
members, or members holding not less than 1710th of the total voting power
in a company, to declare, after giving the parties an opportunity of being
heard, that the affairs of the company ought to be investigated by an
Inspector or Inspectors. On such a declaration being made, the Central
Government shall appoint one or more competent persons as Inspectors to
investigate the affairs of the company and to report thereon. The power,
therefore, to appoint Inspector to investigate the affairs of a company has
to be exercised by the Central Government after a proper preliminary
scrutiny by the Registrar or by the Company Law Board as the case may be.
It cannot be instituted simply on the basis of allegations made by one
shareholder. Under Section 237, there is a further power given to the
Central Government to appoint Inspectors to investigate the affairs of a
company if the company, by a special resolution, or the court, by order
declares that such investigation is necessary. Similarly, this may be done
if in the opinion of the Company Law Board there are circumstances
suggesting that the business of the company is being conducted with intent
to defraud its creditors, members or any other person 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. The Company Law Board may also come to a conclusion that there are
circumstances suggesting that the persons concerned in the formation of the
company or management of its affairs have been guilty of fraud, misfeasance
or other misconduct towards the company or towards any of its members; or
that the members of the company have not been given all the information
with respect to its affairs which they might reasonably expect. In these
circumstances, on the basis of the opinion so framed by the Company Law
Board, the Central Government may order an investigation. Neither the
Central Government nor the Company Law Board has been moved by the 1st
respondent in accordance with law for this purpose. In the case of Rohtas
Industries Ltd. v. S.D. Agarwal & Anr. [1969] 3 SCR 108 this Court examined
the nature of the power conferred on the Central Government under Section
235 as well as 237(b) and held that the scheme of these sections makes it
clear that unless proper grounds exist for investigation of the affairs of
a company, such investigation will not be lightly undertaken. An
investigation may seriously damage a company and should not be ordered
without proper material gathered in the manner provided in the Companies
Act. The power of investigation has been conferred on the Central
Government on the faith that it will be exercised in a reasonable manner.
The department of the Central Government which deals with companies is
presumed to be an expert body in company law matters. Therefore, the
standard that is prescribed under Section 237 (b) is not the standard
required of an ordinary citizen but that of an expert.

In the present case no attempt has been made by the first respondent to get
the affairs of the company investigated in the manner provided under the
Companies Act. Neither the Central Government nor the Company Law Board has
been moved by the 1st respondent in accordance with law for this purpose.
Instead of moving the authorities prescribed under the Companies Act the
first respondent has chosen to resort to the writ jurisdiction of the High
Court for a direction to have the affairs of the company investigated by
the C.B.I.

Under Section 397 of the Companies Act any member of a company who
complains that the affairs of the company are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any member or
members may apply to the Company Law Board for an order under that section.
The Company Law Board has wide powers to make such orders as it may think
fit to bring an end to the matters complained of. Some of the shareholders
of the first appellant-company have, in fact, filed petitions under
Sections 397 and 398 of the Companies Act before the Company Law Board in
which they have asked for similar reliefs including the appointment of an
interim administrator. The acts of mismanagement and oppression complained
of are similar to those set out in the writ petition before the High Court.
The only ground alleged in the writ petition for moving the High Court
under Article 226 is that the Company Law Board is not moving in the matter
under an excuse that the Company Law Board has not yet made an order, a
shareholder cannot be allowed to bypass the express provisions of the
Companies Act and move the High Court under Article 226. A shareholder has
very effective remedies under the Companies Act for prevention of
oppression and mismanagement. When such remedies are available, the High
Court should not readily entertain a petition under Article 226.

Learned Single Judge before whom the present writ petition came up for
hearing very rightly held that the Companies Act provides a forum to
consider the grievances made out by the first respondent in the writ
petition. When such a forum, statutorily constituted, exists, it is but
appropriate that resort to Article 226 should be discouraged There is an
efficacious alternative remedy available under the statute. In fact under
the Companies Act, a more satisfactory solution is available. The Single
Judge was right in pointing out that some of the shareholders have
initiated proceedings before the Company Law Board, The only grievance of
the petitioner in the writ petition is that no orders have been passed
thereon. The Single Judge has rightly held that such a grievance cannot
constitute a ground for invoking the jurisdiction of the High Court under
Article 226, He, therefore, dismissed the writ petition.

In appeal, however, the Division Bench of the Andhra Pradesh High Court
presided over by the Chief Justice, entertained the appeal on the ground
that the petition raised many serious issues as to falsification of the
accounts of a public limited company. It said that the acts of the company
would jeopardize public interest. Therefore, the petition involved wider
“public interest” and should be entertained. In the result the Division
Bench issued a direction to the Central Government to make its own
verification of the allegations in the writ petition. In other words, the
Division Bench of the High Court directed an investigation into the affairs
of the company, bypassing the detailed provisions with inbuilt safeguards
under the Companies Act, designed specially for this purpose. The only
ground for intervention appears to be “public interest”. We fail to see
what public interest is involved in disputes of the kind referred to in the
writ petition. They basically deal with mismanagement of the affairs of the
company and oppression of the minority shareholders. The company in only a
deemed public limited company. Its shareholding is very closely held. The
only other factor referred to in the writ petition to invoke the doctrine
of so called public interest, is the fact that the company had borrowed
moneys from public institutions. This is no ground for not availing of the
statutory remedies provided under the Companies Act before the appropriate
statutory forums which are designed for this very purpose. We are
distressed to find that the well-reasoned judgment of the Single Judge was
interfered with in a casual manner. The impugned judgment rests on fragile
foundations and reads more like an ipse dixit.

The appeal is allowed and the impugned judgment of the Division Bench of
the Andhra Pradesh High Court is set aside. The first respondent shall pay
to the appellants costs of the appeal quantified at Rs. 15,000.

 

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