TaxTMI 
TaxTMI 
TaxTMI 
1958 (7) TMI 30
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.... other acts in contravention of law unduly enriched themselves at the expense and loss of the company causing loss not only to members but also to the Government by suppressing the true income and defrauding the taxes legitimately due." He then proceeded to enumerate what he called a few of the major items of fraud and misconduct of the managing agents (1)The managing agents of the company are a firm consisting of two partners, viz., V. Gopal Naidu and A.V. Srinivasalu Naidu. Between the years 1944 and 1952 three bungalows were constructed in Coimbatore, one for each of the three sons of Gopal Naidu, at a cost of more than Rs. 8,99,000. Every pie of this money was taken out of the funds of the company. (2)A sum of Rs. 70,000, was paid out of the company's funds to the G.E.C. (India) Ltd., Coimbatore, for the work of electrification they did on the three bungalows built for the sons of Gopal Naidu. (3)In 1951 Amirthammal, a granddaughter of Gopal Naidu, was married and in connection with that event a sum of over a lakh of rupees was expended. About Rs. 91,800 of the money thus spent came out of the funds of the mills, the amount being debited to various items such as purchases o....
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....ave addressed certain legal arguments and contended that it was not a fit case either on the facts or in law for the Registrar to find that the affairs of the company were in an unsatisfactory state, that there was no bona fides in the complaint and that it was a fit and proper case wherein the Registrar should find that the complaint was frivolous and vexatious and that he should disclose the identity of the informant to the company. On 27th November, 1956, the Registrar submitted his report to the Government of India. On 10th April, 1957, the Government of India appointed Mr. M.S. Srinivasan, a Chartered Accountant of Coimbatore, as an inspector; "to investigate into the affairs of the company and to point out all irregularities and contraventions in respect of the provisions of the Companies Act or of any other law for the time being in force." On 12th April, 1956, Mr. Srinivasan called at the office of the company and tendered a letter he had himself written pointing out that he had been appointed by the Central Government as an inspector to investigate the affairs of the company and asking that various books be delivered to him. The company telegraphed and also wrote to th....
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.... writing any information or explanation on matters which the Registrar may specify in the order. In the present case no written order has been made conforming to the requirements of the sub-section. This deviation from the procedure prescribed by the sub-section is fatal to the entire proceedings. The result is that the report which ultimately followed must be treated as one having no existence in law; for all legal purposes it is non est. The order of the Central Government based on such a report must also fall. I am unable to accept this objection. On 7th June, 1956, the Registrar of Companies did write a letter to the Coimbatore Spinning and Weaving Company Ltd., enclosing extracts from the complaint which he had received from Parameswara Iyer and calling for very urgent and detailed remarks from the company. I cannot therefore accept the objection that there was no written order calling on the company to furnish its explanation. The omission of the Registrar was not in respect of this but in respect of another matter. What he failed to do was to give the company "an opportunity of being heard" before he made his written order. The company was undoubtedly heard through its advo....
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....ion requires that it should be represented to the Registrar that the business of a company is being carried on in fraud of its creditors or of persons dealing with the company, or otherwise for a fraudulent or unlawful purpose. The representation itself must allege that the business of the company is being carried on in the manner specified. It is not sufficient that the representation should contain allegations that there had been fraud or misfeasance or malfeasance or unlawful or fraudulent activities in the past. The allegations must be that such is the present state of affairs. The complaint which Parameswara Iyer sent to the Registrar contains only allegations of what according to him took place between 1944 and 1952. Those allegations are not equivalent to an allegation "that the business of the company is being carried on in fraud of its creditors," etc. Besides, mere representations to that effect will not do. The sub-section requires that the Registrar, after giving the company an opportunity of being heard, should make a written order calling upon it to furnish its explanation in writing. When the stage is reached the provisions of sub-sections (2), (3), (4), (5) and (6)....
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....ade to the case reported in Southern Railway v. Railway Rates Tribunal [1956] 1 MLJ 395. I agree with both Mr. Krishnaswami Aiyar and with Mr. Thyagarajan that the expression "is being carried on" occurring in sub-section (7) relates to the state of affairs at the time the representation to the Registrar is made and not to something which is a matter of past history. But it does not appear to me to be correct to say that in his letter to the Registrar, Parameswara Iyer did not make any allegation about "the present state" of affairs of the company. In one paragraph of his letter-I have quoted it above and I quote it again now-Parameswara Iyer expressly said : "The said managing agents have since their assumption of office been acting most selfishly jeopardising the interests of the company and have by frauds, misfeasance, misconduct, misappropriation and falsification of accounts and various other acts in contravention of law unduly enriched themselves at the expense and loss of the company causing loss not only to members but also to the Government by suppressing the true income and defrauding the taxes legitimately due." This passage can be fairly read as meaning that ever sin....
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....eral contended, that the proper way to look at the matter is this : You study the allegations and put yourself various questions. Do the allegations suggest a scheme or continuous set of operations ? Are the persons who initiated or who operated the scheme still in a position to carry on as they had been doing in the past ? If that is so, it will be reasonable to infer that they continue their past mode of conduct and are enriching themselves in the same manner that they had been doing in the past. I want to make one thing clear ; I am expressing no opinion whatever on the truth or otherwise of the allegations made by Parameswara Iyer in his letter to the Registrar of Companies. Nor am I offering any comment on the explanation which the company offered. It will suffice for present purposes to say that on the allegations of Parameswara Iyer, the Registrar was entitled to take action under section 234 of the Act and make a report to the Central Government. Parameswara Iyer did not merely allege that there had been one act of misappropriation. According to him, the managing agents of the company had been continuously siphoning off the resources of the company for their private benef....
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....ary purpose of the operations of the company is fraudulent or unlawful. In assessing the validity of this argument one must bear in mind the purpose of this and other similar provisions in the Act. They are intended, if I may use the analogy, to enable medicinal or surgical treatment to be administered to the company before it becomes necessary to do a post-mortem examination. There are various provisions in the Act-not all of them very effective, however formidable they may appear to be on page-which enable delinquent directors or office bearers of the company to be proceeded against. There are also various other provisions which enable further investigation and further pursuit to be made after the company has gone into the hands of the official liquidator. The provisions relating to information and investigation are intended to enable the Government to remedy things even at the outset. Therefore, if it appears that the managing agents of the company have been misappropriating its funds then it will not be an answer to say that no creditor or person dealing with the company has yet been defrauded. That will be the inevitable consequence if the matter is allowed to develop along t....
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....been an irregularity in the procedure of the Registrar. If the court was justified in refusing to issue a writ where the preliminaries were not observed at all as in the English case just referred to, I do not see how an irregularity in observing the preliminaries will justify the issue of a writ. Another argument was based on the terms of section 235 of the Act. That section opens as follows : "The Central Government may appoint one or more competent persons as inspectors to investigate the affairs of any company and to report thereon in such manner as the Central Government may direct." The duties of an inspector appointed under this section, said Mr. Krishnaswami Aiyar, are of a quasi-judicial nature. In order therefore to be competent within the meaning of the section it is not sufficient that he has got the requisite skill to do the work assigned to him. He must also be free from any bias which would disqualify. In the present case Mr. Srinivasan, whom the Central Government have appointed as inspector, is, by reason of his bias, wholly disqualified for holding the enquiry. Mr. Srinivasan was auditor of the Kadri Mills Ltd. in Coimbatore. In his audit report he pointed out ....
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....provides that the report of the inspector "shall be admissible in any legal proceeding as evidence of the opinion of the inspector..........in relation to any matter contained in the report." In spite of all this, I am unable to take the view that the duties of an inspector appointed by the Central Government under section 235 or under section 237 of the Act are quasi-judicial in their nature. The words of the section themselves make it plain that his duty is to investigate the affairs of a company and to report thereon. His position is analogous to that of a sub-inspector of police who goes out to investigate a crime which has been reported at his station. That the inspector appointed under the Companies Act has got powers to take evidence on oath while a sub-inspector of police has no such powers does not make any real difference. To carry out his duties the inspector appointed under the Act is given certain facilities and powers in the same manner as a sub-inspector of police is given facilities and powers under the Criminal Procedure Code. Continuing his argument on this part of the case Mr. Krishnaswami Aiyar said that an inspector appointed under the Act has to make certain....
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....ters in the absolute discretion of the inspector. And finally, he is not required to give any decision on the matter, no report that he may make is binding on the Government or the company or the managing agents or the person at whose instance the Registrar took action. Mr. Krishnaswami Aiyar referred to Venkatasubba Reddi v. Registrar of Co-operative Societies [1956] 1 MLJ. 284 where it was held that the functions of the Registrar of Co-operative Societies in considering the question of registration under section 12(2) of the Co-operative Societies Act, are undoubtedly quasi-judicial. I do not think that this case helps Mr. Krishnaswami Aiyar because a Registrar has to make an order and before doing so he has to be satisfied that there has been no contravention of the Act or the Rules. Besides, the direction that he gives conclusively determines certain rights and is tantamount to an adjudication. Mr. Krishnaswami Aiyar also referred to Southern Railway v. Railway Rates Tribunal [1956] 1 MLJ. 395. But that case deals with Railways Rates Tribunals whose duties are very different indeed from those of an inspector. The decision in Thangal Kunju Musaliar v. Venkatachalam Potti [195....