1968 (12) TMI 50 - SC - Companies Law

Supreme Court overturns Govt's inspector appointment due to lack of relevant material

Rohtas Industries Ltd. Versus SD. Agarwal

The Supreme Court set aside the Central Government's order appointing an inspector to investigate the appellant company, ruling that the Government's ... Whether the order made by the Central Government in No. 2(4)-CL.I/63, Government of India, Ministry of Commerce and Industry, Department of Company Law Administration, on April 11, 1963, is liable to be struck down as not having been made in accordance with law? Held that:- We do not think that any reasonable person, much less any expert body like the Government, on the material before it, could have jumped to the conclusion that there was any fraud involved in the sale of the shares in question. If the Government had any suspicion about that transaction it should have probed into the matter further before directing any investigation. We are convinced that the precipitate action taken by the Government was not called for nor could be justified on the basis of the material before it. The opinion formed by the Government was a wholly irrational opinion. The fact that one of the leading directors of the appellant-company was a suspect in the eye of the Government because of his antecedents, assuming without deciding, that the allegations against him are true, was not a relevant circumstance. That circumstance should not have been allowed to cloud the opinion of the Government. The Government is charged with the responsibility to form a bona fide opinion on the basis of relevant material. The opinion formed in this case cannot be held to have been formed in accordance with law. In the result we allow these appeals and set aside the impugned order. Issues Involved:1. Legality of the Central Government's order dated April 11, 1963, appointing an inspector to investigate the affairs of the appellant company.2. Judicial review of the opinion formed by the Central Government under Section 237(b) of the Companies Act, 1956.3. Adequacy of material before the Central Government to justify the investigation order.4. The relevance of complaints and allegations against the company and its management.5. The impact of the order on the company's right to carry on its business.Issue-wise Detailed Analysis:1. Legality of the Central Government's Order:The central issue was whether the order dated April 11, 1963, appointing an inspector to investigate the affairs of the appellant company, was made in accordance with the law. The order was challenged on the grounds that it was not based on sufficient material to justify the conclusion that the business was being conducted with intent to defraud creditors, members, or other persons.2. Judicial Review of the Opinion Formed by the Central Government:The High Court had dismissed the writ petition, holding that the opinion formed by the Central Government under Section 237(b) of the Companies Act, 1956, was not open to judicial review. This conclusion was challenged in the Supreme Court. The Supreme Court held that while the formation of the opinion by the Central Government is subjective, the existence of the circumstances suggesting the need for an investigation is a condition precedent and is open to judicial review. The court cited the decision in Barium Chemicals Ltd. v. Company Law Board, which established that the existence of relevant circumstances must be demonstrable.3. Adequacy of Material Before the Central Government:The material before the Central Government included complaints and allegations against S. P. Jain, a prominent director of the appellant company, and transactions involving the sale of preference shares of Albion Plywoods Ltd. The court found that the Government had not bestowed sufficient attention to the material before it. The allegations in Annexure 'A' were vague and could not form the basis for the impugned order. Annexure 'B' contained no specific allegations, and Annexure 'C' related to a different company. The only concrete allegation was the sale of preference shares, but the Government did not have sufficient information about the market price of the shares at the time of the transaction. The court concluded that the Government's opinion was based on irrelevant considerations and was not formed in accordance with law.4. Relevance of Complaints and Allegations Against the Company and Its Management:The court examined the complaints and allegations against the company and its management. The affidavit filed by the Secretary to the Government of India mentioned adverse findings against S. P. Jain by a Commission of Inquiry and ongoing prosecutions. However, these allegations were not directly related to the appellant company. The court found that the Government's decision was influenced by its opinion of S. P. Jain, rather than relevant material about the company's affairs.5. Impact of the Order on the Company's Right to Carry on Its Business:The court noted that the investigation under Section 237(b) is a serious matter and should not be ordered except on satisfactory grounds. The appointment of an inspector could adversely affect the company's reputation and prospects. The court emphasized that the power under Sections 235 to 237 must be exercised reasonably and based on relevant material. The court concluded that the Government's opinion was irrational and not formed in accordance with law, and therefore, the impugned order was set aside.Conclusion:The Supreme Court allowed the appeals and set aside the impugned order, holding that the Central Government had not formed its opinion based on relevant material and had taken into consideration irrelevant factors. The court emphasized that the power to appoint an inspector under Section 237(b) should be exercised reasonably and based on demonstrable circumstances suggesting the need for an investigation. The respondents were ordered to pay the costs of the appellant both in the Supreme Court and in the High Court.