1981 (4) TMI 214 - HC - Companies Law

Court quashes overreaching director appointments, upholds statutory limits. Importance of objective facts emphasized.

The court quashed the Company Law Board's order appointing directors on the board of the petitioner-company, finding it exceeded statutory limits and ... Oppression of mismanagement – Powers of Government of prevent, Effect of notified order under section 18A Issues Involved:1. Legality of the appointment of two directors by the Company Law Board (CLB) under Section 408(1) of the Companies Act, 1956.2. Validity of the CLB's findings on the specific transactions of the petitioner-company.3. The scope and limits of the CLB's powers under Section 408.4. The relevance of the Central Government's satisfaction in exercising powers under Section 408.5. The impact of Section 408 on the internal management of companies.Issue-wise Detailed Analysis:1. Legality of the Appointment of Directors:The petition challenged the order dated February 18, 1980, by the CLB appointing two directors to the board of the petitioner-company for three years under Section 408(1) of the Companies Act, 1956. The court analyzed whether the CLB's power under Section 408 was exercised within the statutory limits and found that the satisfaction of the Central Government must be based on objective facts and not arbitrary or whimsical.2. Validity of the CLB's Findings on Specific Transactions:The court examined the specific transactions that led to the CLB's decision:- Transaction with ACCEL: The petitioner-company's order for machinery worth Rs. 4.61 crores from ACCEL was scrutinized. The CLB's finding of overpayment was based on an incomplete evaluation by Dastur & Co. The court found no evidence of personal gain or alternative suppliers, and the evaluation by Dastur & Co. was not adequately challenged.- Advance to SAE (India) Ltd.: The advance of Rs. 15 lakhs for shares was examined. The court found that the delay in share allotment was due to governmental procedures, and the investment was sound, given the market value of shares.- Medical Expenses for Managing Director: The payment of Rs. 1,47,283.23 for medical expenses was initially objected to but later approved by the Central Government. The court found no basis for action under Section 408.- Commission Payments: The payments of commissions to intermediaries were analyzed. The court found that the transactions were business decisions without evidence of personal gain or sham transactions.3. Scope and Limits of the CLB's Powers under Section 408:The court emphasized that the CLB's powers under Section 408 are extraordinary and must be exercised sparingly. The satisfaction of the Central Government must be based on relevant and admissible material, and the exercise of power must be to prevent the affairs of the company from being conducted in a manner prejudicial to the company's or public interest.4. Relevance of the Central Government's Satisfaction:The court held that the Central Government's satisfaction under Section 408 is subject to judicial review. The satisfaction must be based on objective facts, and the exercise of power must not be arbitrary or whimsical. The court found that the CLB's decision lacked material evidence and was based on irrelevant grounds.5. Impact of Section 408 on Internal Management:The court highlighted the importance of leaving the internal management of companies to their members. Government intervention should be limited to exceptional cases where the company's affairs are conducted in a manner prejudicial to public interest. The court referred to the high-powered expert committee's recommendation for minimal government intervention in corporate management.Conclusion:The court quashed the CLB's order appointing directors on the board of the petitioner-company, finding that the CLB acted without satisfying the statutory conditions and in excess of its jurisdiction. The court emphasized the need for objective facts and relevant material to justify the exercise of power under Section 408. The petition was allowed, and the interim directions were vacated.