ICSID Case Law The Barium Chemicals Ltd Vs The Company Law Board

PETITIONER:
THE BARIUM CHEMICALS LTD. AND ANR.

Vs.

RESPONDENT:
THE COMPANY LAW BOARD AND OTHERS

DATE OF JUDGMENT:
04/05/1966

BENCH:
MUDHOLKAR, J.R.
BENCH:
MUDHOLKAR, J.R.
SARKAR, A.K. (CJ)
HIDAYATULLAH, M.
BACHAWAT, R.S.
SHELAT, J.M.

CITATION:
1967 AIR 295 1966 SCR 311
CITATOR INFO :
R 1969 SC 707 (16,19,20,39,46)
RF 1970 SC 564 (26,228,229,235)
R 1970 SC1789 (14)
RF 1972 SC1816 (18)
F 1974 SC1957 (12)
R 1974 SC2105 (10)
RF 1977 SC 183 (26)
R 1978 SC 597 (222)
D 1982 SC 149 (1245)
E 1984 SC 273 (45)
F 1984 SC1182 (11)
C 1984 SC1271 (26)
R 1986 SC 872 (119)
R 1986 SC2173 (12)
R 1986 SC2177 (45)
E&D 1987 SC 294 (38)
R 1990 SC 334 (105)
RF 1990 SC1277 (51)
RF 1991 SC1557 (21)
RF 1992 SC1020 (26)
ACT:
Companies Act, 1956, ss. 10E, 234, 235, 236 and 237-scope of
Whether s. 237(b) violative of Articles 14 and 19(1) (g) of
the Constitution.

 

HEADNOTE:
The Company Law Board was constituted under Section 10E of
the Companies Act, 1956, and the Central Government
delegated some of its powers under the Act, including those
under Section 237, to the Board. The Government also framed
rules under Section 642(1) read with Section 10E(5) called
the Company Law Board (Procedure) Rules 1964, Rule 3 of
which empowered the Chairman of the Board to distribute the
business of the Board among himself and other member or
members and to specify the cases or classes of cases which
were to be considered jointly by the Board. On February 6,
1954, under the power vested in him by Rule 3 the Chairman
passed an order specifying the cases that had to be
considered jointly by himself and the only other member of
the Board and distributing the remaining business between
himself and the member. Under this order the business of
ordering investigations under Sections 235 and 237 was
allotted to himself to be performed by him singly.
On May 19, 1965 an order was issued on behalf of the Company
Law Board under Section 237(b) of the Companies Act.
appointing four inspectors to investigate the affairs of the
appellant company, on the ground that the Board was of the
opinion that there were circumstances suggesting that the
business of the appellant company was being conducted with
intent to defraud its creditors, members or any other
persons and that the persons concerned in the management of
the affairs of the company had in connection therewith been
guilty of fraud, misfeasence and other misconduct towards
the company and its members.
Soon afterwards the appellants filed a petition under Art.
226 of the Constitution for the issue of a writ quashing the
order of the Board on the grounds, inter alia, that the
order had been issued mala fide that there was no material
on which such an order could have been made, etc.
One of the affidavits filed in reply to the petition was by
the ,Chairman of the Company Law Board, in which it was
contended, inter alia, that there was material on the basis
of which the impugned order was issued and he had himself
examined this material and formed the necessary opinion
within the meaning of sec. 237(b) before the issue of the
order; and that it was not competent for the court to go
into the question of the adequacy or otherwise of such
material. In the course of replying to some of the
allegations in the petition it was stated in paragraph 14 of
the affidavit, however, that from memoranda received from
some ex-directors of the company and other examination it
appeared, inter alia, that there had been delay, bungling
and faulty planning of the company’s main project ,resulting
in double expenditure; that the company had incurred huge
losses; there had been a sharp fall in the price of the
company’s
SCI-22
312
shares; and some eminent persons had resigned from the Board
of Directors of the company because of differences with the
Managing Director on account of the manner in which the
affairs of the company were being conducted.
The appellant’s petition was dismissed by the High Court.
In the appeal to this Court it was contended on behalf of
the appellants:
(1) That the order was made made fide on account of the
competing interests of a firm in which the Minister in
charge of the department was interested and also because of
his personal hostility against the second petitioner who was
the managing director of the company; that the High Court
had erred in deciding the petition on the footing that the
first respondent Board was an independent authority and that
it was its Chairman who on his own had formed the requisite
opinion and passed the order and therefore the motive or the
evil eye of the Minister was irrelevant; the High Court also
erred in failing to appreciate that even though the impugned
order was by the Chairman, as under s. 10E(6) it had to
receive and in fact received the Minister’s agreement, if
the Minister’s mala fides were established, that would
vitiate the order; furthermore, in the circumstances of the
case. the High Court ought to have allowed the appellants an
opportunity to establish their case of mala fide by the
cross-examination of the Minister and the Chairman, both of
whom had filed affidavits.
(2) That clause (b) of Section 237 required two things: (i)
the requisite opinion of the Central Government, in the
present case, of the Board, and (ii) the existence of
circumstances suggesting that the company’s business was
being conducted as laid down in sub-clause (i) or that the
persons mentioned in sub-clause (ii) were guilty of fraud,
misfeasance or misconduct towards the company or any of its
members; though the opinion to be formed is subjective, the
existence of circumstances set out in cl. (b) is a condition
precedent to the formation of such opinion and therefore
even if the impugned order were to contain a recital of the
existence of those circumstances, the court can go behind
that recital and determine whether they did in fact exist,
that even taking the circumstances said to have been found
by the respondent Board, they were extraneous to see. 237(b)
and could not constitute a basis for the impugned order.
(3) That the impugned order was in fact made on the basis
of allegations contained in memoranda submitted by four ex-
directors of the company who continued to be shareholders;
and by ordering an investigation under s. 237(b) the
respondent Board had in effect enabled these shareholders to
circumvent the provisions of s. 235 and S. 236. On this
ground also the impugned order was therefore made mala fide
or was otherwise invalid.
(4) That the impugned order was in any case bad as it was
passed by the Chairman of the Respondent Board alone acting
under rules under which such a power was conferred in
contravention of the provisions of Section 10E. The power
under s. 237 was delegated by the Central Government to the
Board as a whole and could not in turn be sub-delegated to
the Chairman alone in the absence of a provision such as
sub-sec. (4A) added to sec. 10E after the impugned order was
issued, and which now enabled the solidarity of the Board to
be broken. Such sub-delegation could not be done in
accordance with rules made under s. 10E(5) which merely
enabled the procedure of the Board to be regulated.
313
(5) That the impugned order was bad because Section 237(b)
itself was bad as offending against Arts. 14 and 19 of the
Constitution.
HELD: (By Hidayatullah. Bachawat and Shelat, JJ.,
Sarkar C.J. and Mudholkar J. dissenting): The impugned order
must be set aside.
(1) (By the Court): The respondents had failed to show that
the impugned order was passed mala fide. L330 E; 335 B-C;
342 F; 354 F-G].
(Per Sarkar C.J. and Mudholkar J.3: The decision to order
the investigation was taken by the Chairman of the
respondent Board and there was nothing to indicate that in
arriving at that decision he was influenced by the Minister.
If the decision arrived at by the Chairman was an
independent one, it could not be said to have been rendered
mala fide because it was later approved by the Minister.
[320 D].
In a proceeding under Art. 226 of the Constitution, the
normal rule is, as pointed out by this Court in The State of
Bombay v. Purshottam Jog Naik [1952] S.C.R. 674, to decide
disputed questions on the basis of affidavits and that it is
within the discretion of the High Court whether to allow a
person who has sworn an affidavit before it to be cross-
examined or not. The High Court having refused permission
for the cross-examination, it would not be appropriate for
this Court, while hearing an appeal. by special leave, to
interfere lightly with the exercise of its discretion. [320
G-H; 321 A].
(Per Shelat J.): The allegations of mala fides in the
petition were not grounded on any knowledge but only on
“reasons to believe”. Even for their reasons to believe,
the appellants had not disclosed any information on which
they were founded. No particulars of the main allegations
were given. Although in a case of this kind it would be
difficult for a petitioner to have personal knowledge in
regard to an averment of mala fides, where such knowledge is
wanting, he must disclose his source of information so that
the other side gets a fair chance to verify it and make an
effective answer. In the absence of tangible materials, the
only answer which the respondents could array against the
allegations as to mala fides would be one of general denial.
[352 D-H].
In a petition under Art. 226, there is undoubtedly ample
power in the High Court to order attendance of a deponent in
court for being cross-examined. Where it is not possible
for the court to arrive at a definite conclusion on account
of there being affidavits on either side containing
allegations and counter-allegations, it would not only be
desirable but in the interest of justice the duty also of
the court to summon a deponent for cross-examination in
order to arrive at the truth. However, the High Court was
rightly of the view that in the present case even if the two
deponents were to be called for cross-examination, they
could in the absence of particulars of allegations of mala
fides and the other circumstances of the case, only repeat
their denials in the affidavits of the allegations in the
petition and therefore such cross-examination would not take
the court any further than the affidavits. [353 D-H].
(2) (Per Hidayatullah, Bachawat and Shelat JJ.
Sarkar, C. J. and Mudholkar J. dissenting,):The
circumstances disclosed in paragraph 14 of the affidavit
must be regarded as the only materials on the basis of
which the respondent Board formed the opinion before
ordering an investigation under Section 237(b). These
circumstances could not reasonably suggest that the business
of the company was being conducted to defraud the creditors,
members or other
L/S5SCI-22(a)
314
persons or that the management was guilty of fraud towards
the company and its members; they were therefore,
-extraneous to the matters mentioned in s. 237(b) and the
impugned order was ultra vires the Section. [339 A-D, G-H;
340 A; 342 G-H; 343 AC; 365 D-E; 367 A-C].
(Per Hidayatullah J.): The power-under Section 237(b) in a
discretionary power and the first requirement for its
exercise is the ‘honest formation of an opinion that an
investigation is necessary. ,The next requirement is that
“there are circumstances suggesting” the inferences stout in
the Section. An action, not based on circumstances
suggesting an inference of the enumerated kind will not
be valid. No doubt the formation of opinion is subjective
but the existence of circumstances relevant to the inference
as the sine qua non for action must be demonstrable. If
their existence is questioned, it has to be proved at least
prima facie. It is not sufficient to assert, that the
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 or the withholding of
information of a particular kind. [335 F-H; 336 G-H]
An examination of the affidavit filed by the Chairman of the
respondent Board showed that the material examined by the
Chairman merely indicated the need for a deeper probe. This
was not sufficient. The material must suggest certain
inferences and not the need for “a deeper probe”. The
former is a definite conclusion the ‘latter a mere fishing
expedition. [338 E-H].
(Per Shelat J.): Althouugh the formation of opinion by cen-
tral 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 what is set out in
sub-clauses (i), (ii) or (iii) of s. 237 (b). The expres-
sion “circumstances suggesting” cannot support the
construction that even the existence of circumstances is a
matter of subjective opinion. It is hard to contemplate
that the legislature could have left to the subjective
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. If it is shown that the circumstances do
not exist or that they are such that it is impossible for
any one to form an opinion therefrom suggestive of the
matters enumerated in s. 237 (b) the opinion is
challengeable on the ground ‘of non-application of mind or
perversity or on the ground that it was formed on collateral
grounds and was beyond the scope of the statute. [362 H; 363
A-G].
(Per Sarkar C.J., and Mudholkar J.. dissenting): An examina-
tion of section 237 would show that cl. (b) thereof confers
a discretion upon the ‘Board to appoint an Inspector to
investigate the affairs of a company. The words “in the
opinion of” govern the word “there are circumstances
suggesting” and not the words “may do so”. The words
‘circumstances’ and ‘suggesting’ cannot be dissociated
without making it impossible for the Board to form an
‘opinion’ at all. The formation of an opinion must,
‘therefore, be as to whether there are circumstances
suggesting the existence of one or more of ‘the matters in
sub-cls. (i) to (iii) and not about anything else. The
opinion must of course not have been arrived at mala fide.
To say that the, opinion to be formed must be as to the
necessity
315
of making an investigation would be making a clear departure
from the language in which s. 237(b) is couched. It is only
after the formation of certain opinion by the Board that the
stage for exercising the discretion conferred by the
provision is reached. The discretion conferred to order an
investigation is administrative and not judicial since its
exercise one way or the other does not affect the rights of
a company nor does it lead to any serious consequences as,
for instance, hampering the business of the company. As has
been pointed out by this Court in Raja Narayanalal Bansilal
v. Maneck Phiroz Mistry and Anr. [1961] 1 S.C.R. 412, the
investigation undertaken under this provision is for
ascertaining facts and is thus merely exploratory. The
scope for judicial review of the action of the Board must,
therefore be strictly limited. If it can be shown that the
Board had in fact not formed an opinion its order could be
successfully challenged. There is a difference between not
forming an opinion at all and forming an opinion upon
grounds, which, if a court could go into that question at
all, could be regarded as inapt or insufficient or
irrelevant.
The circumstances set out in paragraph 14 of the affidavit
of the Chairman of the respondent Board were nothing more
than certain conclusions drawn by the Board from some of the
material which it had before it. Moreover, the expression
“inter alia” used by the Chairman would show that the
conclusions set out by him specifically were not the only
ones which could be drawn from the material before the
Board. It would not therefore be right to construe the
affidavit to mean that the only conclusions emerging from
the material before the Board were those set out in
paragraph 14. [352 A-E].
(3) (Per Sarkar C. J. and Mudholkar J.): As it could not be
said that the investigation had been ordered either at the
instance of 4 ex-directors of the company or on the sole
basis of the memoranda submitted by them, there was no
contravention of the provisions of Sections 235 and 236 of
the Act. [328 C, E].
(4) (Per Sarkar C. J., Mudholkar and Bachawat JJ.,
Hidayatullah and Shelat JJ., dissenting): Rule 3 of the
Company Law Board (Procedure) Rules, 1964, and the order
dated April 6, 1964 made pursuant thereto distributing the
business of the Board, were both valid. The impugned order
was not therefore invalid because it was made by the
Chairman alone and not by the Board. [330 C. D; 342 B-C].
(Per Sarkar C.J. and Mudholkar J.): Bearing in mind the fact
that the power conferred by Section 237(b) is merely
administrative, the allocation of the business of the Board
relating to the exercise of such power must be regarded as a
matter of procedure. Strictly speaking the Chairman to whom
the business of the Board is allocated does not become a
delegate of the Board at all. He acts in the name of the
Board and is no more than its agent. But even if he is
looked upon as a delegate of the Board and, therefore, sub-
delegate vis-avis the Central Government, he would be as
much subject to the control of the Central Government as the
Board itself, for sub-s. (6) of s. 10E provides that the
Board shall, in the exercise of the powers delegated to it,
be subject to the control of the Central Government and the
order distributing the business was made with permission of
the Central Government. Bearing in mind that the maxim
delegates non protest delegable sets out what is merely a
rule of construction, subdelegation can be sustained if
permitted by an express provision or by necessary
implication. Where, as here, what is sub-delegated is an
administrative power and control over its exercise is
retained by the nominee of Parliament, that is, here the
Central Government, the power to make a delegation may be
inferred, [329 F-H; 330 A-C].
316
(Per Bachwat J.): The function under s. 237(b) involves the
exercise of a discretion. Prima facie all the members of
the Board acting together were required to discharge this
function and they could not delegate their duty to the
Chairman. However, under ss. 10E(5) and 642(1), the Central
Government may frame rules regulating the procedure of the
Board and generally to carry out the purpose of the Act. In
the context of s. 10E, the rule making power should be
construed liberally. The Central Government has power to
constitute the Company Law Board, to delegate its function
to the Board and to control the Board in the exercise of its
delegated functions. In this background, by conferring on
the Central Government the additional power of framing rules
regulating the procedure of the Board and generally to carry
out the purposes of s. 10E Parliament must have intended
that the internal Organisation of the Board and the mode and
manner of transacting its business should be regulated
entirely by rules framed by the Government. The Government
had, therefore, power to frame the Company Law Board
(Procedure) Rules. 1964 authorising the Chairman to
distribute the business of the Board. In the exercise of
the power conferred by this rule, the Chairman assioned the
business under s. 237 to himself. The Chairman alone could,
therefore, pass the impugned order. [341 F-H; 342 A-C].
(Per Hidayatullah J.): The new sub-section 4A of Section
10E, which was not there when the impugned order was made.
enables the work of the Board to be distributed among
members, while sub-s. (5) merely enables the procedure of
the Board to be regulated. These are two very different
things. One provides for distribution of work in such a way
that each constituent part of the Board, properly autho-
rised. becomes the Board. The other provides for the
procedure of the Board. What is the Board is not a question
which admits of solution by procedural rules but by the
enactment of a substantive provision allowing for a
different delegation. Such an enactment has been framed in
relation to the Tribunal constituted under s. 10B and has
now been framed under s. 10E also. The new sub-section
involves a delegation of the powers of the Central
Government to a member of the Board which the Act previously
allowed to be made to the Board only. The statute, as it
was formerly, gave no authority to delegate if differently
or to another person or persons. When it spoke of procedure
in sub-section (5) it spoke of the procedure of the Board As
constitlited. The lacuna in the Act must have felt;
otherwise there was no need to enact sub-section (4A), [334
B-E].
(Per Shelat T.): The statute having permitted the delegation
of powers to the Board only as the statutory Authority the
powers so delegated have to be exercised by the Board and
not by its components. To authorise its Chairman to hand
over those functions and powers to the. Board only as the
statutory Authority, the powers so by the Act. The effect
of r. 3 and the order of distribution of work made in
pursuance thereof was not laying down a procedure but au-
thorising and, making a sub-delegation in favour of the
members. The only procedure which the Government could
prescribe was the procedure in relation to Board the manner
in which it should discharge and exercise the functions and
Powers delegated to it, but it could not make a provision
which under the cloak of procedure authorised sub-
delegation. [369 F-H; 370 A, B].
(5) (By the Court): The provisions of Section 237(b) were
not violative of Articles 14 and 19 of the Constitution.
[328 F-G; 342 D-F; 371 H].
Sections 234, 235, 236 and 237(b) gave power to different
authorities i.e. the Registrar and the Government, provided
powers which
317
are different in extent and nature, exercisable in sets of
circumstances and in a manner different from one another.
Therefore, there is no question of discriminatory power
having been vested in the Government under these Sections to
pick and choose between (one company and the other. [370 G,
H].
When investigation is ordered, there would be inconvenience
in the carrying on of the business of the company. It might
also perhaps shake the credit of a company. But an
investigation directed under section 237(b) is essentially
of an exploratory character and it is not as if any
restriction is placed on the right of the concerned company
to carry on its business and no restrictions are imposed on
those who carry on the company’s affairs. Even if it is
regarded as a restriction, it is not possible to say that it
is not protected as a reasonable restriction under Clause 6
of Art. 19(1). [371 B-D].
Case law referred to.

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 381 of 1966.
Appeal by special leave from the judgment and order dated
October 7, 1965 of the Punjab High Court (Circuit Bench) at
Delhi in Civil Writ No. 1626-C of 1965.
M. C. Setalvad, R. K. Garg and S. C. Agarwala, for the
appellants.
C. K. Daphtary, Attorney-General, B. R. L. Iyengar, R. K.
P. Shankardass and R. H. Dhebar, for respondents Nos. 1 and
3 to 7.
S. Mohan Kumaramangalam, C. Ramakrishna and A. V. V. Nair,
for respondent No. 2.
The dissenting Opinion Of SARKAR, C.J. and MUDHOLKAR., J.
was delivered by MUDHOLKAR, J HIDAYATULLAH. BACHAWAT and
SHELAT JJ. delivered separate judgments allowing the Appeal.
Mudholkar, J. On May 19, 1965 Mr. D. S. Dang, Secretary of
the Company Law Board issued an order on behalf of the
Company Law Board made under s. 237 (b) of the Companies
Act, 1956 appointing 4 persons as Inspectors for
investigating the affairs of the Barium Chemicals Ltd.,
appellant No. I before us, since its incorporation in the
year 1961 and to report to the Company Law Board inter alia
“all the irregularities and contravention in respect of the
provisions of the Companies Act, 1956 or of any other law
for the time being in force and the person or persons
responsible for such irregularities and contravention.” The
order was made by the Chairman of the Board, Mr.. R. C. Dutt
on behalf of the Board by virtue of the powers conferred on
him by certain rules to which we shall refer later. On June
4, 1965 the Company preferred a writ petition under Art. 226
of the Constitution in the Punjab High Court for the issue
of a writ of mandamus or other appropriate writ, direction
or order quashing the order of the Board dated May 19, 1965.
The Managing Director, Mr. Balasubramanian joined in the
petition as petitioner No. 2. The writ petition is directed
against 7 respondents, the first of which is the
318
Company Law Board. The second respondent is Mr. T. T.
Krishnamachari, who was at that time Minister for Finance in
the Government of India. The Inspectors: appointed are
respondents 3 to 6 and Mr. Dang is the 7th respondent.
Apart from the relief of quashing- the order of May 19, 1965
the appellants sought the’ issue of a writ restraining the
Company Law Board and the Inspectors from giving effect to
the order dated May 19, 1965 and also sought some other
incidental reliefs. The order of the Board was challenged
on 5 grounds which are briefly as follows:
(1) that the order was made mala fide;
(2) that in making the order the Board had
acted on material extraneous to the matters
mentioned in s. 237(b) of the Companies Act;
(3) that the order having in fact been made
at the instance of the shareholders is invalid
and on a true construction of s. 237 this
could not be done;
(4) that the order was invalid because it
was made by the Chairman of the Board and not
by the Board; and
(5) that the provisions of S. 237(b) are
void as offending Arts. 14 and 19(1) (g) of
the Constitution.
The allegations of mala fides were denied on behalf of the
respondents. They disputed the validity of all the other
grounds raised by the petitioners. The High Court rejected
the contentions urged before it on behalf of the appellants
and dismissed the writ petition. The appellants thereafter
sought to obtain a certificate of fitness for appeal to this
Court; but the High Court refused to grant such a
certificate. They have now come up to this Court by special
leave.
In order to appreciate the arguments addressed before us a
brief statement of the relevant facts would be necessary.
The Company was registered in the year 1961 and had an
authorised capital of Rs. 1 crore divided into 1,00,000
shares of Rs. 100 each. Its primary object was to carry on
business of manufacturing all types of barium compounds.
Appellant No. 2 was appointed Managing Director of the
Company from December 5, 1961 and his appointment and
remuneration were approved by the Central Government on July
30, 1962. The erection of the plant was undertaken by M/s.
L. A. Mitchell Ltd., of Manchester in pursuance of a
collaboration agreement between it and the company entered
in October, 1961 and approved by the Central Government in
November of that year. Thereafter a permit for importing
the requisite machinery was granted to the Company. The
issued capital of the Company was Rs. 50, 00,000 and the
public was invited to subscribe for shares in the Company.
It is said that the issue was oversubscribed by March 12,
1962.
319
It would see that soon after the collaboration agreement was
entered into M/s. L. A. Mitchell Ltd., was taken over by a
financial group (M/s. Pearwn, & Co. Ltd.), to which a.
person named Lord Poole belonged. It would appear that as
the work of setting up of the plant was being delayed the
Company sent a notice- to M/s Mitchell Ltd.., on April 2,
1965 in which the Company stated that if the plant was not
completely installed and got into running order by June 1,
1965 the Company will have to make alternative arrangements
and that it would hold M/s. L. A. Mitchell Ltd., liable to
pay damages to the Company for the loss suffered by it. As
a result of the notice Lord Poole visited India in
April/May, 1965. In his opinion the design of the plant was
defective. Certain negotiations took place between the
Company and Lord Poole in the course of which an undertaking
was given by Lord Poole on at behalf of the collaborators
that the work would be completed with necessary alterations
and modifications in accordance with the report of M/s.
Humphrey & Co., and that the collaborators would spend an
additional amount upto pound 250,000 as may be required for
the purpose. It is said that the plaint was producing at
that time only 25 per cent of its installed capacity but
that according to the assurance given by Lord Poole it would
yield full production by April, 1966.
According to the appellants, before entering into a
collaboration agreement with M/s. L. A. Mitchell Ltd., the
appellant No. 2 Balasubramanian was negotiating with a
German firm named Kali Chemie A. G. of Hanover for obtaining
their collaboration. It is said that the firm of M/s. T.
T. Krishnamachari & Sons were and still are the sole agents
in India for some of the products of Kali Chemie. The firm
of T. T. Krishnamachari & Sons approached appellant No. 2
for the grant of sole selling, agency of the products of the
plant to be established in collaboration with Kali Chemie.
Appellant No. 2 did not agree to this with the result that
the company’s negotiations with Kali Chemie broke down. The
appellants also say that T. T. Krishnamachari & Sonswere
later a so granted a licence to set up a plant for
manufacturing barium chemicals but that on appellant No.
2 bringing certainfacts: to the notice of Mr. Nehru the
licence in favour of T. T. Krishnamachari & Sons was
revoked. The relevance of these facts is in connection with
the plea of mala fides. On this part of the case the
appellant’s contention is that the Chairman of the Company
Law Board Mr. R. C. Dutt made the order for investigation
into the affairs of appellant No. 1 at the instance of Mr.
T. T. Krishnamachari, the then Finance Minister and also
because of his bias against appellant No. 2. The suggestion
is that as the licence of M/s. T. T. Krishnamachari & Sons
was revoked and as they were not even given sole selling
agency for the sale of the products of barium chemicals Mr.
T. T. Krishnaniachari wanted action to be taken under this
provision either for penalising appellant No. 1 or putting
pressure on it.
320
A lengthy argument was addressed before us by Mr. Setalvad
bearing on the question of mala fides in the course of which
he referred us to certain documents. He also wanted us to
bear in mind the sequence in which certain events occurred
and said that these would indicate that the former Finance
Minister must have been instrumental in having an order
under S. 237(b) made by the Chairman of the Board. We were,
however, not impressed by this argument. Our learned
brother Shelat has dealt with this aspect of the matter
fully in his judgment and as we agree with him it is not
necessary to say much on the point. We would, however, like
to refer to and deal with one aspect of the argument bearing
on the question of mala fides. Mr. Setalvad points out that
the Company Law Board had decided in December 1964 to take
action against appellant No. I under s. 237(b) and had
actually obtained approval of Mr. T. T. Krishnamachari to
the proposed action. Therefore, according to him the real
order is of Mr. Krishnamachari even though the order is
expressed in the name of the Board. We find no substance in
the argument. The decision to take action was already taken
by the Chairman and there is nothing to indicate that in
arriving at that decision he was influenced by the Finance
Minister. If the decision arrived at by the Chairman was an
independent one it cannot be said to have been rendered mala
fide because it was later approved by Mr. Krishnamachari
whose sons undoubtedly constitute the partnership firm of
M/s. T. T. Krishnamachari & Sons. It is also suggested by
Mr. Setalvad that the action approved of in December, 1964
was delayed till May, 1965 because in the interval some
negotiations with Kali Chemie had been started and had they
ended fruitfully M/s. T.T. Krishnamachari & Sons would have
got the sole selling agency of the products of barium
chemicals. Now it does seem from ,certain material brought
to our notice that negotiations with Kali Chemie were
revived by appellant No. 2 because of the difficulties which
were being experienced in the working of the collaboration
agreement with M/s. L. A. Mitchell Ltd. No material,
however, is placed before us from which it could be
reasonably inferred that had the negotiations with Kali
Chemie fructified M/s. T. T. Krishnamachari & Sons would
have secured the sole monopoly for sale of the products of
barium chemicals. One more point was urged in connection
with this aspect of the argument and it is that the
appellants were not given an opportunity to cross-examine
Mr. T. T. Krishnamachari and Mr. Dutt. In our opinion, in a
proceedingunder Art. 226 of the Constitution the normal
rule is, as pointedout by this Court in The State of Bombay
v. Purshottam Jog Naik to decide disputed questions on the
basis of affidavits and that it is within the discretion of
the High Court whether to allow a person who has sworn an
affidavit before it-as indeed Mr. Krishnamachari and Mr.
Dutt have-to be cross-examined or not to permit it. In
exercise of. its discretion the High Court has re-
321
fused permission to cross-examine them. In such a case it
would not be appropriate for this Court while hearing an
appeal by special leave to interfere lightly with the
exercise of that discretion.
Mr. Setalvad said that as the appellants had made out a
prima facie case of mala fides in their affidavits, and as
these allegations had been denied by the respondents, the
High Court was in error in refusing permission to the
appellants to cross-examine the persons who swore the
affidavits on the side of the respondents. We are not aware
of the rule on which Mr. Setalvad bases himself. There is
nothing to show that the High Court thought that a prima
facie case of mala fides had been made out. Even in such a
case a court might well hold that it has been demolished by
the affidavits in answer. The court has to find the facts
and if it finds that it can do so without cross-examination
it is not compelled to permit cross-examination. We have no
reason to think that the High Court could not have
ascertained the facts on the affidavits themselves.
Coming to the second point, it would be desirable to repro-
duce s. 237 which reads thus:
“Without prejudice to its powers under section
235 the Central Government-
(a) shall appoint one or more competent
persons as inspectors to investigate the
affairs of a company and to report thereon in
such manner as the Central Government may
direct, if-
(i) the company, by special resolution, or
(ii) the Court, by order,
declares that the affairs of the company ought to be
investigated by an inspector appointed by the Central
Government; and
(b) may do so if, in the opinion of the
Central Government, there are circumstances
suggesting-
(i) that the business of the company is
being conducted with intent to defraud its
creditors, members or any other persons, or
otherwise for a fraudulent or unlawful
purpose, or in a manner oppressive of any of
its members, or that the company was formed
for any fraudulent or unlawful purpose; or
(ii) that persons concerned in the formation
of the company or the management of its
affairs have in connection therewith been
guilty of fraud, misfeasance or other
misconduct towards the company or towards any
of its members; or
(iii) that the members of the company have not
been given all the information with respect to
its
322
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.”
In view of the fact that the Central Government, by virtue
of the powers conferred by ss. 10-E and 637 delegated its
powers under s. 237 to them Company Law Board we shall read
S. 237 as if in place of the words “Central Government”
there are the words “Company Law Board” or for brevity
‘Board’. According to Mr. Setalvad, cl. (b) of s. 237
requires two things: (1) the opinion of the Board and (2)
the existence of circumstances suggesting one or more of the
matters. specified in sub-cls. (i) to (iii). He contends
that though the opinion of the Board is subjective the
existence of circumstances set out in the sub-cls. (i) to
(iii) is a condition precedent to the formation of the
opinion. Therefore, according to him, the Court is entitled
to ascertain whether in fact any of those circumstances
exists. The Attorney-General disputes this construction and
contends that the clause is incapable of a dichotomy and
that the subjective process embraces the formation of an
opinion that circumstances suggestive of any of the matters
comprised in sub-cls. (i) to (iii) exist.
Once it is conceded that the formation of an opinion by the
Board is intended to be subjective-and if the provision is
constitutional which in our view it is-the question would
arise: what is that about which the Board is entitled to
form an opinion? The opinion must necessarily concern the
existence or non-existence of facts suggesting the things
mentioned in the several sub-clauses of cl. (b). An
examination of the section would show that cl. (b) thereof
confers, a discretion upon the Board to appoint an Inspector
to investigate the affairs of a company. The words “in the
opinion of” govern the words “there are circumstances
suggesting” and not the words “may do so”. The words
‘circumstances’ and ‘suggesting’ cannot be dissociated
without making it impossible for the Board to form an
‘opinion’ at all. The formation of an opinion must,
therefore, be as to whether there are circumstances
suggesting the existence of one or more of- the matters in
sub-cls. (D to (iii) and not about any-thing else. The
opinion must of course not have been arrived at mala fide.
To say that the opinion to be formed must be as to the
necessity of making an investigation would be making a clear
departure from the language in which s. 237(b) is couched.
It is only after the, formation of, certain opinion by the
Board that the stage for exercising the discretion conferred
by the provision is reached. The discretion conferred to
order an investigation is administrative and not judicial
since
323
its exercise one way or the other does not affect the rights
of a company nor does it lead to any serious consequences
as, for instance, hampering the business of the company. As
has been pointed out by this Court in Raja Narayanalal
Bansilal v. Maneck Phiroz Mistry & Anr.(1) the investigation
undertaken under this provision is for ascertaining facts
and is thus merely exploratory. The scope for judicial
review of the action of the Board must, therefore, be
strictly limited. Now, if it can be shown that the ‘Board
had in fact not formed an opinion its order could be
successfully challenged. This is what was said by the
Federal Court in Emperor v. Shibnath Banerjee(2) and
approved later by the Privy Council. Quite obviously there
is a difference between not forming an opinion at all and
forming an opinion upon grounds, which, if a court could go
into that question at all, could be regarded as inapt or
insufficient or irrelevant. It is not disputed that a court
can,not go into the question of the aptness or sufficiency
of the grounds ,upon which the subjective satisfaction of an
authority is based. But, Mr. Setalvad says, since the
grounds have in fact been disclosed in the affidavit of Mr.
Dutt upon which his subjective satisfaction was based it is
open to the court to consider whether those grounds are
relevant or are irrelevant because they are extraneous to
the question as to the existence or otherwise of any of the
matters referred to in sub-cls. (i) to (iii).
Let us now examine the affidavit of Mr. Dutt. Since this
affidavit is in answer to the allegations made in the writ
petition the two ;should be considered together. In
paragraphs 1 to 19 of the writ petition certain facts and
figures concerning the formation, registration etc. of the
company, the activities of the company and other related
matters have been set out. These were admitted by Mr. Dutt
in paragraph 14 of the counter-affidavit. Paragraph 20
onwards of the writ petition deals with the action taken by
the Board and the various grounds on which according to the
appellants the action of the Board is open to challenge.
The first 4 paragraphs of the counter-affidavit deal with
certain formal matters. In paragraph 5 Mr. Dutt has set out
that the petition is liable to be dismissed summarily being
grounded on facts which are, false, speculative and lacking
in material particulars. Thereafter he has set out what,
according to him, are the true facts. In paragraphs 6 to 8
he has dealt with the legal aspects of the case. The 8th
paragraph is the most important amongst them. Here Mr. Dutt
has stated that it was not competent to the Court to go into
the question of adequacy or otherwise of the material on the
basis of which orders under s. 237(b) are passed by the
Board. Then he stated: ‘However, if in spite of what has
been stated and contrary to the submissions above, this
Han’ble Court still holds that it is necessary for the
Court to examine the relevant material in
(1)[1961] I S.C.R. 417.
(2)[1944] F.C.R. 1.
324
order to do justice, then the Board would have no objection
to producing the same for the Court’s perusal provided it is
not shown to the petitioners.” It may be mentioned that the
Court did not call for this material at all nor did the
appellants seek its production. In paragraph 9 Mr. Dutt has
categorically stated that the order of May 19, 1965 was
passed after careful and independent examination of the
material by the Chairman and that it was issued in proper
exercise of the powers conferred upon it. He has
specifically denied that it was issued at the instance of
the second respondent. In paragraph 10 Mr. Dutt has taken
the plea that the petition was liable to be dismissed as it
had not been made bona fide but for extraneous reasons and
to create prejudice with a view to thwart statutory
investigation. Then he has set out the circumstances upon
which his contention is based. In paragraph 13 he has
stated that without prejudice to his submissions in the
earlier paragraphs he would reply to allegations contained
in the various paragraphs of the writ petition. Then
follows paragraph 14 upon which Mr. Setalvad has founded an
argument that the grounds disclosed therein being extraneous
the order is invalid. In this paragraph Mr. Dutt has
admitted some of the facts stated in paragraphs 1 to 19. He
has also said that the Board was aware of the fact that the
company had entered into collaboration with M/s. L. A.
Mitchell Ltd. He has then added:…….. but it has no
information of any of the other matters and/or negotiations
with M/s. L. A. Mitchell Ltd., Manchester. However, from
the Memoranda received by the Board referred to in paragraph
5 and other examination it appeared inter alia that:
(i) that there had been delay, bungling and
faulty planning of this project, resulting in
double expenditure. for which the
‘collaborators had put the responsibility upon
the Managing Director, Petitioner No. 2:
(ii) Since its flotation the company has been
continuously showing losses and nearly 1/3rd
of its share capital has been wiped off;
(iii)that the shares of the company which to
start with were at a premium were being quoted
on the Stock Exchange at half their face
value; and
(iv)some eminent persons who had initially
accepted seats on the Board of Directors of
the company had subsequently severed
their connections with it due to differences
with Petitioner No. 2 on account of the manner
in which the affairs-of the company were being
conducted. ”
In paragraph 5 it may be recalled Mr. Dutt has set out the
grounds on which the writ petition deserved to be summarily
325
rejected. It will thus be clear that what are characterised
by Mr. Setalvad as the grounds upon which the order of the
Board is based are nothing more than certain conclusions
drawn by the Boar& from some of the material which it had
before it. Moreover the expression “inter alia” used by Mr.
Dutt would show that the conclusions set out by him
specifically are not the only ones which could be drawn from
the material referred to by, him in paragraph 5 of his
affidavit.
Turning to paragraph 16 of the affidavit we find that Mr.
Dutt has clearly reiterated that there was ample material
before the Board on which it could and did form the opinion
that there were circumstances suggesting that as stated in
the order of May, 19, 1965, the business of the company was
being conducted with intent to defraud creditors, members
and other persons and further that the persons concerned in
the management of the affairs of the company had in
connection therewith been guilty of fraud, misfeasance and
other misconduct towards the company and its members. This
paragraph is in answer to paragraph 21 of the writ petition.
It is in that paragraph alone that the appellants had
specifically raised the contention that the recital in the
order as to the existence of material is not correct and
that in point of fact there was no material before the Board
to form the said opinion. In this state of pleadings it
would not be right to construe the affidavit of Mr. Dutt to
mean that the only conclusions emerging from the material
before the Board are those that are set out in paragraph 14
of his affidavit.
Apart from this we do not think that the conclusions set out
in paragraph 14 are extraneous to the matters indicated in
the order of May 19, 1965. What is said therein is that
there are circumstances suggesting that the business of the
appellants is being conducted with intent to defraud its
creditors, members and others, and that. the persons
concerned with the management of the affairs of the company
have been guilty of fraud, misfeasance and other misconduct
towards the company and its members. it has to be borne in
mind that what the Board is to be satisfied about is whether
the circumstances suggest any of these things and not
whether they establish any of these things. Now, the first
of its conclusion is to the effect that the materials show
that there was delay , bungling, faulty planning of the
project and that this resulted in double expenditure for
which the collaborators had put the responsibility upon the
Managing Director, that is, appellant No. 2. Would it be
farfetched to say that these circumstances could reasonably
suggest to the Board that these happenings were not just
pieces of careless conduct but were deliberate acts or
omissions of appellant No. 2 done with the ulterior motive
of earning profit for himself ? Similarly could not the fact
that the company was continuously showing losses since its
flotation and that 1/ 3rd of its
326
share :-capital had ,been wiped out could have been
suggestive of fraud to the Board.
In ‘this connection, we think it right to point out that the
spirit of the section must be kept in mind in determining
its interpretation. The section was enacted to prevent the
Management of a company from acting in a manner prejudicial
to the interests of the shareholders for whom it was
difficult,to get together and take steps for the protection
of their interests jointly. It was this difculty of the
shareholders-which is a reality-which had led to the
enactment of the section. There is no doubt that few share-
holders have the means or ability to act against the
Management. It would furthermore be difficult for the
shareholders to find out the facts leading to the poor
financial condition of a company. The Government thought it
right to take power to step in where there was reason to
suspect that the Management may not have been acting in the
interests of the shareholders-who would not be able to take
the steps against a powerful body like the Managementand to
take steps for protection of such interests. As we have
said, the section gives the exploratory power only. Its
object is to find out the facts., a suspicion having been
entertained that all was not well with the company. The
powers are exercised for ascertaining facts and, therefore,
before they are finally known, all that is necessary for the
exercise of the powers is the opinion ,of the Board that
there are circumstances which suggest to it that fraud and
other kinds of mismanagement mentioned in sub-cls. (i) to
(iii) of cl. (b) of the section may have been committed. If
the facts do reasonably suggest any of these things to the
Board, the power can be exercised,though another.
individual might think that :-the ;facts suggest otherwise
It cannot be said that from a huge loss incurred by a
company and the working of the company in a disorganised and
un-businegslike way, the only conclusion possible is that
it was due to lack of capability. It is reasonably
,conceivable that the result had been produced by fraud and
other varieties of dishonesty or misfeasance. The order
does not amount to a finding of fraud. It is to find out
what kind of wrong ,action has led to,the company’s ill-fate
that the powers under the sectional given. The enquiry may
reveal that.the renovation or other similar kind of
malfeasance. It would be destroying the beneficial
effective use of the powers given by the section to say that
the Board must first show that a fraud can clearly be said
to have.been committed. It is enough that the facts show
that it can be reasonably thought that the company’s
unfortunate position might have been caused by fraud and
other species of dishonest action. In our opinion,
therefore, the argument of Mr. Setalvad about the
circumstances being extraneous cannot be accepted.
Coming to the third point of Mr. Setalvad pointed out that
four ex-Directors of the Company who had resigned submitted
a
327
memorandum to Mr. T. T. Krishnamachari while he was holding
the office of Finance Minister in which grave allegations
were made concerning the affairs of the Company and the
management of the Company by the second appellant. The
investigation, according to Mr. Setalvad. was the outcome of
this memorandum and that by ordering it the Board has in
effect enabled the ex-Directors who continue to be
shareholders to circumvent the provisions of ss. 235 and 236
of the Companies Act. Section 235 deals with “Investigation
of affairs of company on application by members or report by
Registrar”. Clause (a) of this section provides that in the
case of a company having a share capital the investigation
can be ordered either on the application of not less than
200 members or of members holding not less than one-tenth of
the total voting power therein. We are not concerned with
cls. (b) and (c). Apparently the four ex-Directors were not
holding 10% of the voting power of the Company. At any rate
the case was argued on this footing. Section 236 provides
that such application has to be supported by such evidence
as the Board (reading ‘Board’ for ‘Central Government’) may
require. It also empowers the Board to require the
applicants to furnish security for such amount, not
exceeding one thousand rupees as it may think fit, for the
payment of the costs of the investigation. The contention
is that though the Board acted upon the memorandum submitted
by four ex-Directors it did not even require them to comply
with the provisions of s. 236. The contention is that the
order of the Board appointing Inspectors is invalid. In
other words the argument amounts to this that the provisions
of s. 237(b) have been utilised by the Board as a cloak for
taking action under the provisions of s. 235. In other
words this is an argument that the order was made mala fide.
It is true that a memorandum was presented to Mr. Krishna-
machari by four ex-Directors containing grave allegations
against the two appellants. But it was not solely on the
basis of this memorandum that action was taken by the Board.
It is clear from the counter-affidavit of Mr. Dutt and
particularly from paragraph 5 thereof that the Board had
before it not only two sets of memoranda dated May 30, 1964
and July 9, 1964 respectively from four ex-Directors of the
Company alleging serious irregularities and illegalities in
the conduct of the affairs of the Company but also other
materials. The Board points out that over a long period
beginning from September 1961 the Department had been
receiving various complaints in regard to the conduct of the
affairs of the Company. One complaint had also been
received by the Special Police Establishment and forwarded
by it to the Department in November, 1963. The matter was
enquired into by the Regional Director of the Board at
Madras and he, in his report, sent to the Board in September
1964 suggested an urgent and comprehensive investigation
into the affairs of the Company. In his
/S5SCI-23
328
affidavit the Chairman of the Board Mr. Dutt has stated
further in paragraph 5(b) as follows:-
“The material on the file was further examined
in the light of the Regional Director’s
recommendation by the two Under Secretaries of
the Board (Sarvashri M. K. Banerjee C. S. S.
and K. C. Chand, I. R. S. at the head.
quarters of the Board in New Delhi and both of
them endorsed the recommendation of the
Regional Director to order an investigation.
The matter was then considered by the
Secretary of the Company Law Board in charge
of investigation (Shri D. S. Dang, I.A.S.) and
he also expressed his agreement that there was
need for a deeper probe into the affairs of
the company.”
Then again in paragraph 5(c) he has stated as
follows:-
“Accordingly, the matter was put up to me at the
end of November 1964 and after consideration
of all the material on record, I formed the
opinion that there were circumstances
suggesting the need for action under section
237(b) of the Companies Act, 1956”.
It is abundantly clear from all this that the investigation
cannot be said to have been ordered either at the instance
of the four ex-Directors or on the sole basis of the
memoranda submitted by them. There is, therefore, no
contravention of the provisions of SS. 235 and 236 of the
Act. As a corollary to this it would follow that the order
was not made mala fide or is otherwise invalid.
As already stated the appellant had challenged the
provisions of S. 237(b) on the ground that they are
violative of the fundamental rights under Arts. 14 and
19(1)(g) of the Constitution. Our brother Shelat has dealt
with this attack on the provisions fully and we agree
generally with what he has said while dealing with the
contentions. We would, however, like to add that the com-
pany being an artificial legal person cannot, as held by
this Court in The State Trading Corporation of India Ltd.,
v. Commercial Tax Officer Visakhapatnam & Ors.(1),claim the
benefit of the provisions of Art. 19(1)(g) though appellant
No. 2 Balasubramanian can do so. We agree with our learned
brother that the action proposed under S. 237(b) being
merely, exploratory in character the fundamental right of
Balasubramanian to carry on business is not affected
thereby. Since that is so, the question whether the pro-
visions of the aforesaid section are a reasonable
restriction on the exercise of the right under Art. 19(1)(g)
does not arise for consideration. In the circumstances,
therefore, we do not think that there is anything more that
we need say.
The last question is whether it was not competent to Mr.
Dutt alone to take the decision that an investigation be
ordered against the company. In taking the decision Mr.
Dutt acted under a rule
1964] 4 S.C.R. 99.
329
of procedure prescribed in the order dated February 6, 1964.
The validity of this rule is challenged, by Mr. Setalvad on
the ground that this amounts to sub-delegation of a
delegated power and is ultra vires the Act. Clause (a) of
sub-s. (1) of s. 637 read with s. 10(E)(1) empower the
Central Government to delegate its powers under s. 237 to
the Company Law Board. By notification dated February 1,
1964 the Central Government has delegated, amongst other
powers and functions, those conferred upon it by s. 237 upon
the Company Law Board. By another notification of the same
date the Central Government has made and published rules
made by it in exercise of its powers under s. 642(1) read
with S. 10E(5) rule 3 of which reads thus:-
“Distribution of business;-The Chairman may,
with the previous approval of the Central
Government, by order in writing, distribute
the business of the Board, among himself and
the other member or members, and specify the
cases or classes of cases which shall be
considered jointly by the Board.”
By order dated February 6, 1964 the Chairman of the Company
Law Board specified the cases and classes of cases to be
considered jointly by the Board and distributed the
remaining business between himself and other members of the
Board. Amongst the matters allocated to the Chairman is the
appointment of an Inspector under s. 237 to investigate the
affairs of a company. This, Mr. Setalvad says” could not be
done in the absence of an express provision in the Act. In
this connection he has referred us to sub-s. 4A of s. 10E
which was subsequently added-but not made retrospective-by
an amendment of the Act which confers an express power on
the Central Government to enable the Chairman to distribute
the powers and functions of the Board. According to the
learned Attorney-General this provision was enacted only to
make what was implicit in s. 10E(5) read with S. 642(1)
clear and that the distribution of the work of the Board
being merely a matter of procedure the order of the Chairman
allocating the power under s. 237(b) to himself did not
amount to sub-delegation of the power of the Board.
Bearing in mind the fact that the power conferred by s.
237(b) is merely administrative it is difficult to
appreciate how the allocation of business of the Board
relating to the exercise of such power can be anything other
than a matter of procedure. Strictly speaking the Chairman
to whom the business of the Board is allocated does not
become a delegate of the Board at all. He acts in the name
of the Board and is no more than its agent But even if he is
looked upon as a delegate of the Board and, therefore, a
sub-delegate vis-a-vis the Central Government he would be as
much subject to the control of the Central Government as the
Board itself. For sub-s. (6) of s. 10E provides that the
Board shall, in
S5SCI-23(a)
330
the exercise of the powers delegated to it, be subject to
the control of the Central Government and the order
distributing the business was made with the permission of
the Central Government. Bearing in mind that the maxim
delegatus non potest delegare sets out what is merely a rule
of construction, sub-delegation can be sustained if
permitted by an express provision or by necessary impli-
cation. Where, as here, what is sub-delegated is an
administrative power and control over its exercise is
retained by the nominee of Parliament, that is, here the
Central Government, the power to make a delegation may be
inferred. We are, therefore, of the view that the order
made by the Chairman on behalf of the Board is not invalid.
To sum up, then, our conclusions may be stated thus:- The
discretion conferred on the Central Government by s. 237(b)
to order an investigation and delegated by it to the Company
Law Board is administrative, that it could be validly
exercised by the Chairman of the Board by an order made in
pursuance of a rule enacted by the Central Government under
S. 642(1) read with s. 10E(5), that the exercise of the
power does not violate any fundamental right of the company,
that the opinion to be formed under S. 237(b) is subjective
and that if the grounds are disclosed by the Board the Court
can examine them for considering whether they are relevant.
In the case before us they appear to be relevant in the
context of the matter mentioned in sub-cls. (i) to (iii) of
s. 237(b). Though the order could successfully be
challenged if it were made mala fide, it has not been shown
to have been so made. The attack on the order thus fails
and the appeal is dismissed with costs.
Hidayatullah, J. We are concerned in this appeal with the
legality of an order of the Chairman, Company Law Board, May
19, 1965, (purporting to be under S. 237(b) of the Companies
Act, 1956) declaring that the affairs of the Barium
Chemicals Ltd. be investigated. As a consequence Inspectors
have been appointed and searches have been made. The
Company and its Managing Director filed a petition under
Art. 226 of the Constitution in the High Court of Punjab
seeking to quash the order and on failure there, have filed
this appeal by special leave of this Court. The action of
the Chairman was and is challenged on diverse grounds but
those which were presented before us were few and clear cut.
The action is challenged as without jurisdiction because not
the Board but the Chairman alone acted, as mala fide because
no honest opinion was formed on the matters which under the
section give rise to the power but on irrelevant and
extraneous material, and further because the order was
passed under the influence and malice of a Minister of
Cabinet who was interested in another Company belonging to
his sons and sought this means to oust a rival.
The facts have been stated already in some detail by my
brother Shelat and I need not take time in restating them.
My
331
order proposed by him but as I view the matter a little
differently on some of the aspects of the case, I wish to
record my reasons briefly.
Under the Companies Act 1956, a power of superintendence
over the affairs of Companies is retained by the Central
Government in much the same way as the Board of Trade in
England exercise over Companies in that country. This power
is of two kinds (a) calling for information or explanation
from the Company and (b) ordering an investigation into the
affairs of the Company by appointment of Inspectors for
inspection, investigation and report. The power is not only
varied but is capable of being exercised variously. The
power to call for information is conferred on the Regisrar
in two different ways. Firstly, jurisdiction is conferred
on the Registrar by s. 234 to call for information or
explanation in relation to any document submitted to him,
which information or explanation must be furnished on pain
of penalties. If the information or explanation is not
furnished or is unsatisfactory the Registrar can report to
the Central Government for action. Secondly, if a
contributory, creditor ‘or other person interested places
materials before the Registrar (a) that the business of the
Company is being carried on in fraud of its creditors or of
persons dealing with the Company or (b) otherwise for a
fraudulent or unlawful purpose, the Registrar can, after
hearing the Company, call upon it to furnish any information
or explanation. A further power is conferred after December
28, 1960, on the Registrar, who may, after being authorised
by a Presidency Magistrate or a Magistrate First Class,
enter any place, search and seize any document relating to
the Company, its managing agents, or Secretaries and
treasurers or managing director or manager, if be has reason
to believe that it may be destroyed or tampered with.
Sections 235-251 provide for investigation of the affairs of
a company and for sundry matters related to such
investigations. They follow the scheme of ss. 164-175 of
the English Act of 1948. Section 235 enables the Central
Government to appoint inspectors for investigation and
report generally if the Registrar reports under s. 234 and
also if a stated number of shareholders or shareholders
possessing a stated voting power apply. When’ members apply
they must support their application by evidence and give
security for costs of investigation. In the present case no
action under any of the sections noted so far was taken but
it was taken under s. 237. This section is in two parts.
The first part which is (a) compels the Central Government
to appoint inspectors to investigate and report if the
company by a special resolution or the court by order
declares that the affairs be investigated. The second part
which is (b) gives a discretionary power, As this dis-
332
cretionary power was in fact exercised this is a convenient
place to read part (b) of s. 237. It reads:-
“237. Without prejudice to its powers under
section 235, the Central Government-
(a)
(b) may do so (i.e. appoint one or more
competent persons as inspectors to investigate
etc.) if, in the opinion of the Central
Government, there are circumstances
suggesting-
(i) that the business of the company is
being conducted with intent to defraud its
creditors, members or any other persons, or
otherwise for a fraudulent or unlawful
purpose, or in a manner oppressive of any of
its members, or that the company was formed
for any fraudulent or unlawful purpose;
(ii) that persons concerned in the formation
of the company or the management of its
affairs have in connection therewith been
guilty of fraud, misfeasance or other
misconduct towards the company or towards any
of its members; or
(iii) that the members of the company have not
been given all the information with respect to
its affairs which they might reasonably
expect, including information relating to the
calculation of the commission payable to a
managing or other director, the managing
agent, the secretaries and treasurers, or the
manager, of the company.
By s. 237(b) the power is conferred on the Central
Government but under the Companies (Amendment) Act, 1963 a
Board of Company Law,, Administration consisting of a
Chairman and a member has been set up. This Board is
constituted under s. 10E which has been introduced in the
parent Act. The section may be read here:-
“10E. Constitution of Board of Company Law
Administration.
(1) As soon as may be after the commencement
of the Companies (Amendment) Act, 1963, the
Central Government shall, by notification in
the Official Gazette, constitute a Board to be
called the Board of Company Law Admin
istration
to exercise and discharge such powers and
functions conferred on the Central Government
by or under this Act or any other law as may
be delegated to it by that Government.
333
(2) The Company Law Board shall consist of
such number of members, not exceeding five, as
the Central Government deems fit, to be
appointed by that Government by notification
in the Official Gazette.
(3) One of the members shall be appointed by
the Central Government to be the chairman of
the Company Law Board.
(4) No act done by the Company Law Board
shall be called in question on the ground only
of any defect in the constitution of, or the
existence of any vacancy in, the Company Law
Board.
(5) The procedure of the Company Law Board
shall be such as may be prescribed.
(6) In the exercise of its powers and
discharge of its functions, the Company Law
Board shall be subject to the control of the
Central Government.
The Board was constituted on February 1, 1964 by a
notification and by a notification of even, date in exercise
of the powers conferred by cl. (a) of sub-s. (1) of s. 637
read with sub-s. (1) of s. 10E of the Companies Act, the
Central Government delegated its powers and functions to the
Board under s. 237(b) among others. Simultaneously acting
in exercise of the powers conferred by sub-s. (1) of s. 642
read with sub-s. (5) of s. 10E the Central Government made
the Company Law Board (Procedure) Rules, 1964 and one such
rule dealt with distribution of business to the following
effect:-
“3. Distribution of business-The Chairman may,
with the previous approval of the Central
Government, by order in writing, distribute
the business of the Board among himself and
the other member or members, and specify the
cases or classes of cases which shall be
considered jointly by the Board.”
The Chairman by an order dated February 6, 1964 specified
the cases or classes of cases which are to be considered
jointly by the Board and distributed the remaining business
of the Board between the Chairman and the member each acting
individually. The power under s. 237 was placed among the
powers exercisable by the Chairman singly. That is how
action was taken in the name of the Board but by the
Chairman and is the subject of challenge for the reason that
a power delegated to the Board as a whole cannot be
delegated to an individual member in the absence of a
provision such as sub-s. (4A) added recently to s. 10E
enabling the solidarity of the Board to be broken. Sub-
section (4A) of s. 10E, which has been added by an amending
Act of 1965, after the events in this case, reads:-
“10E. (4A). The Board. with the previous
approval of the Central Government, may, by
order in writing,
334
authorise the chairman or any of its other
members or its principal officer (whether
known as secretary or by any other name) to
exercise and discharge, subject to such
conditions and limitations, if any, as may be
specified in the order, such of its powers and
functions as it may think fit; and every order
made or act done in the exercise of such
powers or discharge of such functions shall be
deemed to be the order or act, as the case may
be, of the Board.”
This sub-section enables the work of the Board to be
distributed among members while sub-s. (5) merely enables
the procedure of the Board to be regulated. These are two
very different things. One provides for distribution of
work in such a way that each constituent part of the Board
properly authorised, becomes the Board. The other provides
for the procedure of the Board. What is the Board, is not a
question which admits of solution by procedural rules but by
the enactment of a substantive provision allowing for a
different delegation. Such an enactment has been framed in
relation to the Tribunal constituted under s. 10B and has
now been framed under s. 10E also. The new sub-section
involves a delegation of the powers of the Central
Government to a member of the Board which the Act previously
allowed to be made to the Board only. The statute, as it
was formerly, gave no authority to delegate it differently
or to another person or persons. When it spoke of procedure
in sub-section (5) it spoke of the procedure of the Board as
constituted. The lacuna in the Act must have been felt,
otherwise there was no need to enact sub-section (4A). The
argument of the learned Attorney-General that sub-s. (4A)
was ?lot needed at all, does not appeal to me. It is quite
clear that its absence would give rise to the argument
accepted by me, which argument is unanswerable in the
absence of a provision such as the new sub-section. My
brother Shelat has dealt with this aspect of the case fully
and I cannot add anything useful to what he has said. I
agree with him entirely on this point.
I shall now consider the question of mala fides. This
arises in two different ways. There is first mala fides
attributed to the chairman because he is said to have acted
under the behest of a Minister of Cabinet interested in
another rival Company. It is not necessary to go into it.
The Chairman obtained the opinion of quite a few of his
assistants (perhaps more than was altogether necessary) and
this fact is stated to establish his fairness to and honest
dealing with the Company. There is nothing to show that
this was done on purpose to cover up a conspiracy to do harm
to the Company. On the other hand I cannot overlook the
fact that the rival Company itself had obtained a licence to
manufacture Barium Chemicals which it allowed to lapse.
This shows that rivalry between two manufacturing concerns
was not the prime
335
motive. No doubt the rival Company had tried to obtain the
sole selling rights of, and even a share in, this Company.
This might have weighed with me but for the fact that the
Company itself had done nothing even before action was
taken, to establish itself. The whole project had hung fire
and capital was eaten into a rapid rate because there were
technical defects in the setting up of the plant and
machinery. There was not much hope of profits as a sole
selling agent or even as a partner. In these circumstances,
I cannot go by the allegations made against the Chairman of
the Board personally or those made against the Minister, and
I find no evidence to hold that dishonesty on the part of
the one or malice on the part of the other lies at the root
of this action.
This brings me to the third and the last question, namely,
whether mala fides or the ultra vires nature of the action
has been established in this case to merit interference at
our hands. In view of my decision on the question of
delegation it is hardly necessary to decide this question
but since contradictory opinions have been expressed on it
by my brethren Mudholkar and Shelat. I must give my views
on this matter. The question naturally divides itself into
two parts. The first is whether there was any personal
bias, oblique motive or ulterior purpose in the act of the
chairman. The second is what are the powers of the Board in
this behalf and whether they have been exercised contrary to
the requirements of the Act. The first ground has already
been dealt with in part when I considered the malice and
influence of the Minister. It may be said at once, that
apart from that allegation, nothing has been said
attributing to the Chairman any personal bias, grudge,
oblique motive or ulterior purpose. Even in the arguments
it was not suggested that the Chairman acted from improper
motives. Therefore, all that I have to consider is whether
the action of the Chairman can be challenged as done either
contrary to the provisions empowering him or beyond those
provisions.
In dealing with this problem the first point to notice is
that the power is discretionary and its exercise depends
upon the honest formation of an opinion that an
investigation is necessary. The words “in the opinion of
the Central Government” indicate that the opinion must be
formed by the Central Government and it is of course
implicit that the opinion must be an honest opinion. The
next requirement is that “there are circumstances suggesting
etc.” These words indicate that before the Central
Government forms its opinion it must have before it
circumstances suggesting certain inferences. These
inferences are of many kinds and it will be useful to make a
mention of them here in a tabular form:-
(a) that the business is being conducted
with intent to defraud-
(i) creditors of the company, or (ii)
members,
336
or (iii) any other person;
(b) that the business is being conducted-
(i) for a fraudulent purpose or (ii) for an
unlawful purpose;
(c) that persons who formed the company or
manage its affairs have been guilty of-
(i) fraud
or (ii) misfeasance or other misconduct– to
wards the company or towards any of its
members.
(d) That information has been withheld from
the members about its affairs which might
reasonably be expected including calculation
of commission payable to-
(i) managing or other director,
(ii) managing agent,
(iii) the secretaries and treasurers,
(iv) the managers.
These grounds limit the jurisdiction of the Central Govern-
ment. No jurisdiction, outside the section which empowers
the initiation of investigation, can be exercised. An
action, not based on circumstances suggesting an inference
of the enumerated kind will not be valid. In other words,
the enumeration of the inferences which may be drawn from
the circumstances, postulates the absence of a general
discretion to go on a fishing expedition to find evidence.
No doubt the formation of opinion is subjective but the
existence of circumstances relevant to the inference as the
sine qua non for action must be demonstrable. If the action
is questioned on the ground that no circumstance leading to
an inference of the kind contemplated by the section exists,
the action might be exposed to interference unless the
existence of the circumstances is made out. As my brother
Shelat has put it trenchantly:-
“It is not reasonable to say that the clause
permitted the government to say that it has
formed the opinion on circumstances which it
thinks exist…………………
Since the existence of “circumstances” is a condition
fundamental to the making of an opinion, the existence of
the circumstances. if questioned, has to be proved at least
prima facie. It is not sufficient to assert that the
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 or the withholding of
information of a particular kind. We have to see whether
the Chairman in his affidavit has shown the existence of
circumstances leading to such tentative
337
conclusions. If he has, his action cannot be questioned
because the in reference is to be drawn subjectively and
even if this Court would not have drawn a similar inference
that fact would be irrelevant. But if the circumstances
pointed out are such that no inference of the kind stated in
s. 237(b) can at all be drawn the action would be ultra
vires the Act and void.
Now the Chairman in his affidavit referred to two memoranda
dated May 30, 1964 and July 4, 1964 presented by certain ex-
directors and also stated that from September 1961
complaints were being received in regard to the conduct of
the affairs of the Company, and one such complaint was
received from Special Police Establishment in November 1963.
The nature of the complaints was not disclosed but in
reference to the memoranda it was stated that
“irregularities” and “illegalities” in the conduct of the
affairs of the Company was alleged therein. It was also
stated that the memoranda “were supported by documentary
evidence and details of the impugned transactions and the
signatories offered to produce witnesses with knowledge of
these transactions”. This was followed by an enquiry by the
Regional Director of the Board at Madras (Shri R. S.
Ramamurthi, I.A.S.) who made a report in September 1964.
The report was next considered by two Under Secretaries arid
by the Secretary of the Company Law board who all agreed
“that there was need for a deeper probe into the affairs of
the Company”. The matter was then placed before the
Chairman who formed the opinion that there were circum-
stances suggesting the need for action under s. 237(b).
None of the reports was produced. Nor was there any
indication in the affidavit what their drift was. There was
considerable delay in taking up the matter and this was
explained as occasioned by the language riots, and other
more pressing occupation. It appears that in the High Court
an offer was made to place the reports etc. in the hands of
the Court provided they were not shown to the other side,
but no such offer was made in this Court. The High Court
did not look into the documents.
Had the matter rested there it would have been a question
whether this Court should interfere with a subjective
opinion, when the affidavit showed that there were materials
for consideration. It would then have been a question
whether this Court could or should go behind the affidavit.
I leave that question to be decided in another case where it
arises. In this case it is not necessary to decide it
because the affidavit goes on to state:-
“……….. However from the Memoranda
received by the Board referred to in paragraph
5 and other examination it appeared inter alia
that:-
(i) there had been delay, bungling and
faulty planning of this project, resulting in
double expenditure, for which the
collaborators had put the responsibility upon
the Managing Director, Petitioner No. 2,
338
(ii) Since its floatation the company has
been continuously showing losses and nearly
1/3rd of its share capital has been wiped off;
(iii) that the shares of the company which to
start with were at a premium were being quoted
on the Stock Exchange at half their fa
ce value;
and
(iv) some eminent persons who had initially
accepted seats on the Board of directors of
the company had subsequently severed their
connections with it due to differences with
Petitioner No. 2 on account of the manner in
which the affairs of the company were being
conducted.”
Paragraph 14 of the affidavit).
It may be mentioned that in paragraph 16 of the affidavit
the Chairman also stated:-
“With reference to paragraph 21 of the
petition, I have already stated above that
there was ample material before the Board on
which it could and did form the opinion that
there were circumstances suggesting that the
business of the company was being conducted
with intent to defraud its creditors, members
and other persons and further that the persons
concerned in the management of the affairs of
the company had in connection therewith been
guilty of fraud, misfeasance and other
misconduct towards the company and its
members.”
The question thus arises what has the Chairman placed before
the Court to indicate that his action was within the four
corners of his own powers? Here it must be noticed that
members are ordinarily expected to take recourse to the
Registrar because there they have to be in a certain number
or command a certain proportion of the voting power. They
are also required to give evidence and the Company gets an
opportunity to explain its actions. If s. 237(b) is used by
members, as an alternative to s. 236, the evidence must
unerringly point to the grounds on which alone action can be
founded. In my opinion there is nothing to show that the,
reports which were being received from September 1961, or
the report of the Special Police Establishment indicated
fraud. illegality or action or actions with intent to
defraud, as contemplated by the section. The affidavit
merely says that these reports indicated the need for a
deeper probe. This is not sufficient. The material must
suggest certain inferences and not the need for “a deeper
probe”. The former is a definite conclusion the latter a
mere fishing expedition. A straight-forward affidavit that
there were circumstances suggesting any of these inferences
was at least necessary. There is no such affidavit and the
reason is that the Chairman completely misunderstood his own
powers. This is indicated by the enumeration of the four
circumstances, I have extracted from his affidavit and I
proceed to analyse them.
339
The first circumstance is “delay, bungling and faulty plan-
ning” resulting in “double expenditure” for which the
collaborators had put the responsibility on the second
appellant. None of these shows an intent to defraud by
which phrase is meant something to induce another to act to
his disadvantage. The circumstances mentioned show
mismanagement and inefficiency which is not the same thing
as fraud or misconduct. The second and the third
circumstance merely establish that there was loss in making
this project work and that a part of capital had been lost.
This was admitted by the appellants who pointed out that
after considerable negotiations they induced Lord Poole, the
President of the collaborating firm, to invest a further sum
of pound 25,000. This shows that the appellants were in a
position to dictate to the collaborating company which they
would not have been able to do if they were guilty of
fraudulent conduct. The last circumstance does not also
bear upon the subject of fraud and acts done with intend to
defraud. that some directors have resigned does not
establish fraud or misconduct. There may be other reasons
for the resignation.
In the other part of the affidavit the Chairman has merely
repeated s. 237(b) but has not stated how he came to the
conclusion and on what material. In other words, he has not
disclosed anything from which it can be said that the
inference which he has drawn that the Company was being
conducted with intent to defraud its creditors, members and
other persons or persons concerned in the management of the
affairs of the Company were guilty of fraud, misfeasance and
misconduct towards the company and its members was based on
circumstances present before him. In fact, paragraph 16 is
no more than a mechanical repetition of the words of the
section.
Coming now to the affidavit of Mr. Dang I find that he
merely repeats what was stated in the affidavit of the
Chairman. He also said that he had seen the papers and
agreed with his two Under Secretaries and the Regional
Director that a “deeper probe” was necessary’ There is no
hint even in this affidavit that the circumstances were such
as to suggest fraud, intent to defraud or misconduct, this
is to say, circumstances under which investigation can be
ordered. The other affidavits also run the same way and it
is not, therefore, necessary to refer to them. We are
concerned really with the affidavits of the Chairman and Mr.
Dang in relation to the exercise of the power conferred by
s. 237(b). Neither proves the existence of circumstances
under which the power could be exercised. In my opinion,
therefore, the action has not been proved to be justified.
No doubt, the section confers a discretion but it sets its
own limits upon the discretion by stating clearly what must
be looked for in the shape of evidence before the drastic
act of investigation into the affairs of a company can be
taken. The affidavits which were filed in answer to the
petition do not disclose
340
even the prima facie existence of these circumstances. On
the other hand, they emphasise only that there was
mismanagement and losses which necessitated a “deeper
probe”. In other words, the act of the Chairman was in the
nature of, a fishing expedition and not after satisfaction
that the affairs of the Company were being carried on even
prima facie with the intent to defraud or that the persons
incharge were guilty of fraud or other misconduct. As to
the constitutionality of s. 237(b) I agree with my brethren
Bachawat and Shelat and have nothing to add. 1, therefore.
agree with my brother Shelat that the appeal must be
allowed. There will be no order about costs.
Bachawat, J. The order dated May 19, 1965 was passed by the
Chairman of the Company Law Board Mr. Setalvad submitted
that only the Board could pass an order under s. 237, the
Central Government could delegate its function under s. 237
to the Board but it had no power to authorise the Chairman
to sub-delegate this function to himself and consequently,
the Company Law Board (Procedure) Rules, 1964 made by the
Central Government on February 1, 1964 and the Chairman’s
order of distribution of business dated February 6, 1964
delegating the function of the Board under s. 237 to the
Chairman are ultra vires the Companies Act and the impugned
order is invalid. The learned Attorney-General disputed
these submissions.
As a general rule, whatever a person has power to do
himself, he may do by means of an agent. This broad rule is
limited by the operation of the principle that a delegated
authority cannot be redelegate, delegates non protest
delegate. The naming of I delegate to, do an act involving
a discretion indicates that the delegate was selected
because of his peculiar skill and the confidence reposed in
him, and there is a presumption that he is required to do
the act himself and cannot redelegate his authority. As a
general rule, “if the, statute directs that certain acts
shall be done in a specified manner or by certain persons,
their performance in any other manner than that specified or
by any other person than one of those name is impliedly
prohibited.” See Crawford on statutory Construction, 1940
Edn., art. 195, p. 335:- Normally, a discretion entrusted by
Parliament to an administrative organ must be exercised by.
that organ itself. If a statute entrusts an administrative
function involving the exercise of a discretion to a Board
consisting of two or more persons it is to be presumed that
each member of the Board should exercise his individual
judgment on the matter and all, the members of the Board
should act together and arrive at a joint decision. Prima
facie, the Board must act as a whole and cannot delegate its
function to one of its members.
The learned Attorney-General submitted that a distribution
of business among the members of the Company Law Board is
not a delegation of its authority, and the maxim has no
application in
341
such a case. I cannot accept this submission. In Cook v.
Ward(1), the Court held that where a drainage board
constituted by an Act of Parliament was authorised by it to
delegate its powers to a committee, the powers so delegated
to the committee must be exercised by them acting in concert
and it was not competent to them to apportion those powers
amongst themselves and one of them acting, alone, pursuant
to such apportionment, could not justify his acts under the
statute. Lord Coleridge, C. J. said at p. 262:- “It was not
competent to them to delegate powers, which required the
united action of the three, to be exercised according to the
unaided judgment of one of them.” Again, in Vine v. National
Dock Labour Board(1), the House of Lords, held that a local
board set up, under the scheme embodied in the schedule to
the Dock Workers (Regulation of Employment) Order, 1947 had
no power to assign its disciplinary function under cls.
15(4) and 16(2) of the scheme to a committee and the
purported dismissal of a worker by the committee was a
nullity. In my opinion, the distribution of the business of
the Board among its members is a delegation of its
authority.
But the maxim “delegatus non potest delegare” must not be
pushed too far. The maxim does not embody a rule of law.
It indicates a rule of construction of a statute or other
instrument conferring an authority. Prima facie, a
discretion conferred by a statute, on any authority is
intended to be exercised by that authority, and. by no
other. But the intention may be negatived by any contrary
indications in the language, scope or object of the statute.
The construction that would best achieve the purpose and
object of the statute should be adopted.
Under ss. 10E(1) and 637(1)(a), the Central Government has
power to constitute a Company, Law Board and to delegate its
functions to the Board. The Board can consist of such
number of persons not exceeding five as the Government
thinks fit. One of the members of the Board has to be
appointed a Chairman and this necessarily implies that the
Board shall consist of at least two members. As a matter of
fact, the Government constituted a Board consisting of two
members and appointed one of them as Chairman. To this
Board the Government delegated its function under s. 237.
Section 637 shows that the function under s. 237 can be
delegated to the Board and to no other authority. The
function under s. 237(b) involves the exercise of a
discretion. Prima facie, all the members of the Board
acting together were required to discharge this function and
they could not delegate their duty to the Chairman.
However, under ss. 10E(5) and 642(1), the Central Government
may frame rules regulating the procedure of the Board and
generally to carry out the purposes of the Act. In the
context of s. 10E, I am inclined to construe this rule-
making power liberally The Central Government has power to
constitute the Company Law Board, to delegate its functions
to the Board and to control
(1) [1877] L.R. 2 C.P.D. 255.
(2) [1957] A.C. 488.
342
the Board in the exercise of its delegated functions. In
this background, by conferring on the Central Government the
additional power of framing rules regulating the procedure
of the Board and generally to carry out the purposes of s.
10E, the Parliament must have intended that the internal
Organisation of the Board and the mode and manner of
transacting its business should be regulated entirely by
rules framed by the Government. The Government had,
therefore, power to frame the Company Law Board (Procedure)
Rules, 1964 authorising the Chairman to distribute the
business of the Board. In the exercise of the power
conferred by this rule, the Chairman assigned the business
under s. 237 to himself. The Chairman alone could,
therefore, pass the impugned order. Act No. 31 of 1965 has
now inserted sub-s. (4A) in s. 10E authorising the Board to
delegate its powers and functions to its Chairman or other
members or principal officer. The power under sub-s. (4A)
may be exercised by the Board independently of any rules
framed by the Central Government. We find, however, that
the Central Government had under ss. 10E(5) and 642(1) ample
power to frame rules authorising the Chairman to distribute
the business of the Board. The wide ambit of this rule-
making power is not cut down by the subsequent insertion of
sub-s. (4A) in s. 10E.
Sections 235, 237(a) and 237(b) enable the Central Govern-
ment to make an order appointing an inspector to investigate
the affairs of a company in different sets of circumstances,
and the contention that s. 237(b) is discriminatory and is
violative of Art. 14 must fail. I also think that s. 237(b)
is not violative of Arts. 19(1)(f) and 19(1)(g) of the
Constitution. The company is not a citizen and has no
fundamental right under Art. 19. Appellant No. 2 who is the
managing director of the company is not a citizen, but even
assuming that s. 237(b) imposes restrictions on his right of
property or his right to carry on his occupation as managing
director, those restrictions are reasonable and are imposed
in the interests of the general public.
On the question of mala fides, I am inclined to think that
the Chairman passed the order dated May 19, 1965
independently of and without any pressure from the Minister.
I am all the more persuaded to come to this conclusion
having regard to the fact that in paragraph 14 of his
affidavit the Chairman has disclosed the circumstances which
he took into account in passing the order. In paragraphs 5,
8 and 16 of his affidavit, the Chairman stated that he had
various materials on the basis of which he passed the order.
But, on reading this affidavit as a whole and the affidavit
of Mr. Dang, I am satisfied that in paragraph 14 of his
affidavit the Chairman has set out all the material
circumstances which bad emerged on an examination of the
various materials before him. Briefly put, those
circumstances are delay, bungling and faulty planning by the
management resulting in double expenditure, huge losses,
sharp fall in the price of the Company’s shares and the
resignation of some of the directors on account of
differences in opinion with
343
the managing director. I think that these circumstances,
without more, cannot reasonably suggest that the business of
the company was being conducted to defraud the creditors,
members and other persons or that the management was guilty
of fraud towards the company and its members. No reasonable
person who had given proper consideration to these
circumstances could have formed the opinion that they
suggested any fraud as mentioned in the order dated May 19,
1965. Had the Chairman applied his mind to the relevant
facts, he could not have formed this opinion. I am, there-
fore, inclined to think that he formed the opinion without
applying his mind to the facts. An opinion so formed by him
is in excess of his powers and cannot support an order under
s. 237(b). The appeal is allowed, and the impugned order is
set aside. I concur in the order which Shelat, J. proposes
to pass.
Shelat J. The appellant company is a public limited company
registered on July 28, 1961 having its registered office at
Ramavaram in Andhra Pradesh and the second appellant was at
all material times and is still its managing director.
On August 25, 1959 and September 23, 1960 appellant No. 2
obtained two licences for the manufacture of 2500 and 1900
tonnes of barium chemicals per year in the name of
Transworld Traders of which lie was the proprietor. He then
started negotiations with Kali Cliemle of Hannover, West
Germany to collaborate with him in setting up a plant.
While he was so negotiating, M/s., ,T. T. Krishnamachari &
Co., who were the sole selling agents of the said German
Company, approached the 2nd appellant for the sole selling
agency of barium products of the plant proposed to be put up
by the 2nd appellant. The 2nd appellant did not agree. On
December 5, 1960 M/s. T. T. K. & Co., applied for a licence
for manufacture of barium chemicals. On December 23, 1960
the 2nd appellant wrote a letter to the Minister of Commerce
and Industry objecting to the grant of a licence to M/s. T.
T. K. & Co. Both were considered by the Licensing Committee.
The Committee rejected the application of M/s. T. T. K. &
Co., but advised them to apply again after six months. On a
representation by M / s. T. T. K. &.Co., the Committee
reconsidered the matter and recommended the grant of licence
to M/s. T. T. K. Chemicals Private Limited. The second
appellant once more protested, this time to the Prime
Minister but that was rejected.
On July 28, 1961. an agreement between the appellant company
and L.A. Mitchell Ltd., of Manchester was signed where under
the latter agreed to put up the plant on the appellant
company agreeing to pay them pound 184,500. On November 27,
1961, the Government granted a licence to the company for
the import of machinery., In the mean time, respondent No. 2
was appointed a, Minister without portfolio and rejoined the
Cabinet which lie had left’ earlier owing to certain
circumstances which are not relevant for the present. From
January, 1962 to March, 1963, he continued as a
L/S5SCI-24
344
Minister without portfolio but from March, 1963 to
September, 1963, he became the Minister for Defence and
Economic Co-ordination and thereafter the Finance Minister.
On August 30, 1962, the licence granted to M / S. T. T. K.
Chemicals Ltd. was revoked as the company had decided to
surrender it.
It would seem that the appellant company was not faring as
well as was hoped and though it had been incorporated as
early as July, 1961 production had not commenced. There
arose also disputes among its directors. On May 30, 1964
and July 9, 1964 four of its directors submitted two
memoranda alleging irregularities and even illegalities in
the conduct of the company’s affairs to the Company Law
Board. According to the second appellant, the four
directors were disgruntled directors, hostile to him and the
Company. The company was not able to start work in full
capacity not because of any irregularities but because of
the faulty planning and designing by the collaborators. The
company realised this fact only in June, 1964 when it
received a survey report after the breakdown of the plant
during that month from M/s. Humphreys and Glascow
(Overseas) Ltd., Bombay. In September, 1964, a meeting was
affanged in London between the company’s representatives and
the representatives of L.A. Mitchell Ltd., of which Lord
Poole was the Chairman. It was agreed that L. A. Mitchell
Ltd., should depute M/s. Humphreys and Glascow Ltd.,
London,to go through the designs etc., and to make a report
showing the causes of the repeated failures of the plant and
suggesting remedies there for. Lord Poole also agreed that
the factory would be commissioned without any further delay
and that L.A. Mitchell Ltd., would carry out the necessary
repairs at their cost. While these negotiations were going
on, representatives of M/s. Kali Chemie of Hannover arrived
in India to negotiate a collaboration agreement with the
company. On April 4, 1965, a meeting of the company’s
directors was held in New Delhi which was attended by one
Kriegstein, a representative of Kali Chemie and also by the
General Manager of M/s. T. T. K. & Co. Certain proposals
were discussed and it was decided that the company should
give notice to L. A. Mitchell Ltd. canceling the agreement
with them. Accordingly, by a notice dated April 2. 1965 the
agreement with the said L. A. Mitchell Ltd., was cancelled.
On May 7, 1965 representatives of the appellant company and
of Kali Chemie met at Stuttgart when proposals for an
agreement were discussed. One of these proposals was that
the company should be reorganised and its share capital
should be distributed in the following proportions:- 49 per
cent to the appellant company, 26 per cent to Kali Chemie
and 25 per cent to M/s. T. T. K. & Co. It was also proposed
that Kali Chemie should take over the responsibility on the
production side, the appellant company would be responsible
for the management and M/s. T.T.K. & Co. should take over
sales promotion. Before however these negotiations could
take concrete shape, Lord Poole came over to India. A meet-
ing was held on May 10, 1965 between him and the directors
of the
345
appellant company. Lord Poole agreed that the British
company would put in pound 250,000 in addition to the amount
already invested by it and that production would commence
from June, 1965. On May It 1965 another meeting took place
when it was decided that without prejudice to what was
stated in the notice of April 4, 1965, the appellant company
should withdraw para 9 thereof whereby the agreement between
them was terminated. By May 11, 1965, the position
therefore was that the collaboration agreement between the
company and L. A. Mitchell Ltd. was agreed to be continued
and consequently the negotiations with the German company
and M/s. T. T. K. & Co., were not to proceed further.
On May 19 1965 the first respondent passed the impugned
order which inter alia stated:-
“In the opinion of the Company Law Board there
are circumstances suggesting that the business
of M/s Barium Chemicals Ltd is being conducted
with intent to defraud its creditors, members
and other persons; and further that the
persons concerned in the management of the
affairs of the company have in connection
therewith been guilty of fraud, misfeasance
and other misconduct towards the company and
its members.
Therefore, in exercise of the powers vested by
clause (b) of section 237 of the Companies Act
1.956 (Act, 1 of 1956, read with the
Government of India, Department of Revenue
Notification No. GSR 178 dated the 1st
February 1964, the Company Law Board hereby
appoint ……………… as Inspectors to
investigate the affairs of the company since
its incorporation in
1961………………………”
On May 25, 1965 search warrants were obtained by respondents
3 to 10 and accordingly search was carried out at the office
of the company at Ramavaram and at the residence of the
second appellant and several documents and files were
seized. On May 28, 1965, the second appellant submitted a
representation to the chairman of the first respondent
Board. He explained that out of the company’s paid up
capital of Rs. 50 lacs, shares of the value of about Rs. 47
lacs were owned by members of the public, that the company
was the first of its kind in India, that it could not go
into production soon because of the defective planning by
the collaborators, that as a result of recent negotiations,
the collaborators had agreed to invest pound 2,50,000 more
and that the company’s factory had now commenced production
from April 1964, that the Board appeaired to have acted on
the complaints filed by the said four directors who resented
the second appellant’s refusal to purchase their holdings at
a price above par demanded by them; that though those
complaints were lodged some two years ago and were not acted
L/S5SCI-24(a)
346
upon, they were sought now to be made the basis of the
impugned order on account of trade rivalry between the
company and M/s. T. T. K. & Co., that the order was mala

 

 

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