Government director appointment under section 408 requires present prejudice, disclosed material, and respect for existing RBI regulation.

Section 408 of the Companies Act, 1956 requires a present, jurisdictional satisfaction based on real and disclosed material that a company's affairs are being conducted prejudicially to the company or public interest; conjecture about possible future harm is insufficient. The power cannot be used to bypass or indirectly regulate a subject already governed by a special statutory regime, and where RBI directions were already regulating the deposit scheme and the company was acting in conformity with them, recourse to section 408 was impermissible. An order that relied on matters not disclosed in the show-cause notice also offended natural justice and could not stand.

---

---

Issues: Whether the Central Government could invoke section 408 of the Companies Act, 1956 to appoint Government directors on the footing that the company's affairs were being conducted in a manner prejudicial to the interests of the company or public interest, and whether the impugned order could stand when the relevant scheme was already regulated by directions issued by the Reserve Bank of India.

Analysis: Section 408 confers power only when the statutory condition precedent is satisfied, namely, that the affairs of the company are being conducted in a manner prejudicial to the interests of the company or to public interest. The Court held that this satisfaction must rest on real materials showing present prejudice, not on conjecture about possible future consequences. It further held that where the Reserve Bank of India, acting under its own statutory powers, had already issued directions regulating the relevant deposit schemes, and the company was operating in conformity with those directions, the Company Law Board could not use section 408 to regulate the scheme indirectly or to bypass the special statutory regime. The Court also found that the impugned order travelled beyond the show-cause notice by relying on matters not disclosed therein, which offended the principles of natural justice.

Conclusion: The statutory precondition for action under section 408 was not established, the Company Law Board lacked jurisdiction to pass the impugned order, and the order was illegal and void.

Final Conclusion: The writ petition succeeded, and the show-cause notice and the order appointing Government directors were quashed.

Ratio Decidendi: The power to appoint Government directors under section 408 of the Companies Act, 1956 can be exercised only on a present and jurisdictional satisfaction, supported by disclosed and relevant materials, that the company's affairs are being conducted prejudicially to the company or public interest; that power cannot be used to supplant or override a special statutory regulatory regime already operating on the same subject.

---