TaxTMI 
TaxTMI 
1965 (8) TMI 49
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt of the Company Law Committee, 1952, page 3). The lacuna in the Act left the way open to some businessmen to misuse and at times to pervert the provision o{ the law to serve their private ends. So long as the Second World War lasted, the pull of war economy on domestic production masked these malpractices but the end of the war exposed them to the full view of an increasingly critical public. Thus arose the demand for amendment of the Indian Companies Act, particularly on the following aspects: "(i)the manner in which companies were promoted and formed with particular reference to the law about prospectuses, minimum subscription and allotment of shares; (ii)the nature and scope of the control exercised by shareholders on the management of a company ; (iii)the powers and functions of directors and the control exercised by them over the companies and their managing agents; (iv)the terms of appointment and conditions of service of managing agents and their powers and functions vis-a-vis the directors of a company and the general body of shareholders ; (v) the powers of investigation and inspection conferred on Government in cases of gross mismanagement of the affai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....amended, during the first decade of its operation, so as to plug the holes and escape routes, as and when those came to notice. Section 209(4) of the new Act contains provisions for inspection and sections 235 to 251 contain provisions for investigation. I have referred to the historical background necessitating the enactment of the Companies Act, 1956, at some length, because the present state of things is the consequence of the past and it is natural to inquire as to the sources of the good that we enjoy or evils we suffer. With this preface, I now turn to relate the circumstances in which this rule was issued. The petitioner-company, the New Central Jute Mills Co. Ltd., feels aggrieved by an order of investigation of its affairs and also by the manner in which the same is being conducted and has moved this court for relief. The petitioner-company claims to be a prosperous concern with a paid up share capital of Rs. 2,89,00,000 and further claims to own two jute mills, the two largest single units in the industry, known as Albion Jute Mills and Lothian Jute Mills and one chemical and fertilizer factory known as Sahu Chemicals and Fertilisers. According to the petitioners....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t six copies of his final report to the Central Government not later than four months from the date of issue of this order unless time in that behalf is extended by the Central Government. A separate order will issue with regard to the remuneration and other incidental expenses of the Inspector ". On receipt of the order, the petitioner-company wrote to the respondent Deputy-Secretary, on June 12, 1963, objecting to the investigation, inter alia, on the grounds that the order was unwarranted and without jurisdiction and made on consideration of extraneous circumstances. By the said letter, the petitioner-company also requested the respondent-Deputy Secretary to furnish itself with materials on the basis of which the order had purportedly been made. The respondent-Deputy Secretary replied to the letter, on June 17, 1963, repudiating the allegations and regretting inability to disclose the materials. Without prejudice to its objections hereinbefore referred to, the petitioner-company alleges to have given all facilities and assistance to S. P. Chopra in making the investigation, namely, by making books and papers available to him whenever he wanted, by supplying to him such ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 237, there cannot be further sufficient cause for inspection of books under section 209(4) of the Companies Act. The respondent Deputy-Secretary replied to the letter on November 6, 1963, repudiating the contentions made by the petitioner-company and asking the petitioner-company to comply with the order or to face the consequence. While this type of correspondence was going on, the extension of time given to S.P. Chopra to complete the investigation and submit his report expired and the respondents were obliged to give him a second extension of time up to January 31, 1964, by an order dated October 31, 1963. Even during this extended period, S.P. Chopra did not make any headway excepting that he wanted to utilise I. M. Puri as his deputy for the purposes, inter alia, of checking the statements supplied by the petitioner-company with its books and records. This attempt merely produced bulky correspondence about the scope of deputising permissible for Mr. Puri. Time for completion of the investigation and report had, therefore, to be extended for the third time, up to June 30, 1964, by an order dated January 29, 1964. This extended time was also uselessly consumed. With....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spectors was last fixed as June 30, 1964; And whereas it has been represented to the Central Government that due to the refusal of the company and its officers to produce all books and other papers or to appear before the inspectors for the purpose of examination and other non-co-operative and dilatory tactics, if would not be possible for them to complete the investigation and submit their report by the aforesaid date; And whereas Shri S. Prakash Chopra, inspector, has regretted his inability to continue any longer with this appointment due to his other professional engagements; And whereas after consideration of the aforesaid circumstances and also the magnitude of the work involved, the Central Government are of the opinion that certain modifications/additions in the orders already issued are necessary; Now, therefore, in exercise of the powers conferred by sub-clauses ( i) and (ii) of clause (b )of section 237 of the Companies Act, 1956 (1 of 1956), the Central Government hereby appoints Shri S. C. Bafna, an Accounts Officer in the Company Law Board, as co-inspector with Shri I. M, Puri, in place of Shri S. Prakash Chopra. The two inspectors shall have coextensive p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....priate authority in a bona fide manner. In support of this proposition, Mr. Deb relied on a judgment of the House of Lords in Ridge v. Baldwin [1963] 2 All. ER 66, 79; [1964] AC 40 in which Lord Reid reviewed the case law and condemned the dictum in Nakkuda Ali v. Jayaratne [1951] AC 66, in the following language: "The authority chiefly relied on by the Court of Appeal in holding that the watch committee were not bound to observe the principles of natural justice was Nakkuda Ali v. Jayaratne [1951] AC 66. In that case the Controller of Textiles in Ceylon made an order cancelling the appellant's licence to. act as a dealer, and the appellant sought to have that order quashed. The controller acted under a defence regulation, which empowered him to cancel a licence 'where the controller has reasonable grounds to believe that any dealer is unfit to be allowed to continue as a dealer'. The Privy Councik regarded that as: 'imposing a condition that there must in fact exist such, reasonable grounds known to the controller before he can validly exercise the power of cancellation ' But according to their judgment certiorari did not lie and no other means was suggested whereby the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t together with the recommendation by the police for detention under rule 26 of the Defence of India Rules, orders for detention were to issue as a matter of course must be condemned as void, inasmuch as that direction effected a substitution of the satisfaction of the police in place of the satisfaction of the Governor. Lastly, he relied on a decision of the House of Lords in Roberts v. Hopwood [1925] AC 578, in which, explaining the meaning of bona fide exercise of statutory power, Lord Sumner observed (pages 603-604): "Bona fide here cannot simply mean that they are not making a profit out of their office or acting in it from private spite, nor is bona fide a short way of saying that the council has acted within the ambit of its powers and therefore not contrary to law. It must mean that they are giving their minds to the comprehension and their wills to the discharge of their duty towards that public, whose money and local business they administer." The substance of his argument on this point is that where an Act left an action dependent upon the opinion of the administration, by some such expression as "is satisfied" or " is of the opinion" or "if it has reason to believ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....form a fully objective opinion about the malpractices mentioned in sub-clauses (i), (ii) and (iii), before the investigation brings out relevant materials for the formation of such an opinion. It may merely form the opinion that there are circumstances, which may be capable of innocent interpretation, but until so done, suggestively sinister. This is a form of opinion which is lesser in degree than the self-confident opinion based on reasonable materials, commonly known as objective opinion but is certainly greater in degree than the speculative view, which goes by the name of subjective satisfaction. The Government may proceed under section 237(b) only if there are "circumstances suggesting" the existance of malpractices envisaged in sub-clauses (i), (ii ) and (iii) of clause (b). In other words, the Central Government must proceed reasonably and must not be actuated by bad faith or dishonesty, must exclude from consideration matters which are irrelevant and must act according to law and not humour. When I say that the Central Government must proceed reasonably, I intend to say what was said by Lord Greene M.R. in Associated Provincial Picture Houses Ltd. v. Wednesbury Corporation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....up this branch of his contention with the criticism that the Central Government did not act reasonably, had no reasonable ground to take steps against the petitioner-company under section 237(b) and was actuated by malice in law in making the impugned order. I am glad to notice that Mr. Deb did not, in his wisdom, allege malice in fact against the respondents, which would have been difficult for me to decide in a writ petition, but merely alleged malice in law, which denotes absence of legal excuse. I agree with the criticism by Mr. Deb to this extent that the affidavit-in-opposition is mostly uninformative. According to the affidavit-in-opposition there are materials in the official records suggesting the existence of malpractices as in sub-clauses (i) and (ii) of clause (b ) of section 237. The respondents do not claim privilege in respect of such materials. Nothing was easier for the respondents than to plead or disclose some of the materials in justification of the action taken. In writ matters, affidavits are the only pieces of evidence which are before the court. If such affidavits are vague and uninformative or merely make general allegations, devoid of particulars, their....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ioner-company for the years 1955 to 1962-63 (all annexed to the petition) that Sahu Jain Ltd. is and has been the managing agent of the petitioner-company. It is not disputed that Shanti Prasad Jain is the Chairman of the board of directors of Sahu Jain Ltd. The Central Government appears to entertain the opinion that there are circumstances suggesting that members of the firm of N. C Jain & Co., statutory auditors to the petitioner-company, are employed in other concerns belonging to or controlled by Shanti Prosad Jain. Now, the value of an audit report depends upon the independence and integrity of the auditors. If it appears that auditors are under some sort of obligation to the company, the accounts of which they audit, there may arise a doubt that the auditors might have discharged their functions much too indulgently. If such a doubt arises, it cannot be ignored as a doubt which no reasonable man should entertain. In the affidavit-in-reply the petitioner no doubt denies that any member or members of the firm of auditors were employed as alleged. I am not in a position to decide which version is correct. Be that as it may, paragraph 4 of the affidavit-in-opposition makes one d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ground alone I am satisfied that a prima facie case suggesting the necessity of investigation has been made out. I need notice, at this stage, that it is not the argument of Mr. Deb that the impugned order of April 11, 1963, suffers from any other infirmity excepting that the Central Government was actuated by malice in law. [There is no procedure prescribed for formation of the opinion excepting that the Central Government need proceed only on the basis of reasonable hypothesis or suggestive circumstances. The order was made by the appropriate authority -" By and in the name of the President of India"-and the opinion was also formed by the Central Government. The order cannot be characterised as not bona fide made, because, apart from allegations of malice in law, there is no allegation of malice in fact. The materials disclosed in paragraph 4 of the affidavit-in-opposition are circumstances, which may suggest to a reasonable man the necessity of a probe into the affairs of the petitioner-company. I have, therefore, to overrule the first branch of 'the contention urged by Mr. Deb. Mr. Deb next contended that the non-disclosure of the materials or circumstances on which the o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se it could go to the difficult length of showing that the circumstances were of no relevancy at all. I have already noticed one relevant circumstance which may be used in justification of the order. For the reasons given above, I do not make much of this argument; Mr. Deb, thirdly, contended that the order of investigation dated April 11, 1963, as made, was not warranted by section 237(b) because : (a)the manner of investigation was not specified; (b)the investigation was not limited to sub-clauses (i) and (ii) of section 237(b) but was made inclusive, inter alia, of contravention of any other law for the time being in force; (c)the investigation was directed to embrace the period from after April 1, 1958, but that notwithstanding, the decision to conduct investigation in respect of the period prior to April 1, 1958, was left to the personal discretion of the inspector; (d)there was a time-limit fixed for completion of the investigation and submission of the final report but at the same time power to extend the time was unlawfully assumed. I am unable to uphold the contention for reasons hereinafter stated seriatim : (a) Under section 237(b), which no doubt attra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....months but at the same time reserved the liberty to extend the time. If the Central Government can fix a time-limit, it may also unfix the limit and refix or extend I the time. The failure on the part of an inspector to submit the report within the time administratively fixed certainly amounts to breach of duty on his part but the investigation does not lapse because of such breach and the authority which had ordered the investigation may condone the expiry of time and further extend the time for making the report. For the reasons given, I do not think that the order dated April 11, 1963, as made, was unwarranted by section 237(b). The fourth argument of Mr. Deb was that an investigation under section 237(b) was impressed with a quasi-judicial character and must conform to the minimum requirements of judicial procedure. Those requirements, according to Mr. Deb, inter alia, are that the inspector or inspectors first appointed must himself or together themselves complete the investigation - and submit the report and that this duty and responsibility must not be shared with another, must not be delegated to another, during the investigation, and others must not be allowed to come i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the character of investigation under section 237 should be taken to be of a different type or character. The Supreme Court approved of the observations of Lord Thankerton in Hearts of Oak Insurance Co. [1932] AC 392 in the case of Raja Narayan Bansilal v. Maneck Phiroz Mistry [1960] 30 Comp. Cas. 644 ; AIR 1961 SC 21. Dealing with an investigation under the Companies Act, Gajendragadkar J. (as the Chief Justice then was) observed at page 39: "It is well-known that the provisions of the Act are modelled on the corresponding provisions of the English Companies Act. It would, there fore, be useful to refer to the observations made by the House of Lords in describing the character of the enquiry held under the corresponding provisions of the English Act in the case of Hearts of Oak Insurance Co. Ltd.'s case (supra)." His Lordship thereafter quoted passages from the decision of the House of Lords and further observed at page 40 : "Thus it is clear that the examination of, or investigation into, the affairs of the company cannot be treated as a proceeding started against any individual after framing an accusation against him." I need notice in passing that the Madras High Cou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll be determinative of the question whether the authority set up by the statute has the duty to act judicially or not. The inference whether the authority acting under a statute, where it is silent, has the duty to act judicially will depend on the express provisions of the statute read along with the nature of the rights affected, the manner of the disposal provided, the objective criterion, if any, to be adopted, the effect of the decision on the person affected and other indicia afforded by the statute. A duty to act judicially may arise in widely different circumstances, which it will be impossible and indeed inadvisable to attempt to define exhaustively." Mr. Deb contended that there were enough indicia afforded by the Companies Act that in the discharge of his duties under section 237( b), even if administrative in nature, an inspector was required to act judicially. He drew my attention to the following provisions of the Companies Act, namely: (i)section 240 which entitles the inspector to compel production of documents, to examine witnesses on oath and also have them examined through courts of law ; (ii)section 240A which entitles the inspector to effect seizure of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....v. Electricity Commissioners [1924] 1 KB 171, 205, which I quote below: "Wherever any body of persons having legal authority to determine questions affecting the rights of subjects, and having the duty to act judicially, act in excess of their legal authority they are subject to the controlling jurisdiction of the King's Bench Division exercised in these writs." He further relied upon the approval of Lord Atkin's summary by the Supreme Court in Province of Bombay v. Kusaldas S. Advani [1950] SCR 621 and also read to me the following passage from the judgment, of Scrutton L.J. in Rex v. London County Council [1931] 2 KB 215, 233: "It is not necessary that it should be a court in the sense in which this court is a court; it is enough if it is exercising, after hearing evidence, judicial functions in the sense that it has to decide on evidence between a proposal and an opposition. " In my opinion, Mr. Chaudhuri is right in his submission. The inspector decides nothing. He merely probes into the affairs of a company and embodies in the report his opinion. The document is admissible in evidence only as a piece of opinion. The opinion, by itself, does not affect the rights of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inspectors, first appointed, and further submitted that if the duty of the inspector or body of inspectors was to form an opinion, the formation of such opinion could not be delegated to or shared with a co-worker or successor. In support of the last proposition, Mr. Deb relied upon the following cases : (i) Vine v. National Dock Labour Board [1956] 3 All. ER 939 in which Lord Somervell observed that disciplinary power, whether judicial or not, cannot be delegated, (ii) Taraprasanna v. UOI, [1956] 61 CWN 849 which followed National Dock Labour Board [1956] 61 CWN 849. There are two reasons for which I am unable to uphold this argument. In the first place, the nature of work to be done by the inspector is not such as cannot be partly delegated or shared or left to a successor. An inspector is not a disciplinary authority, as in the two cases referred to by Mr. Deb, nor even an authority competent to give a judgment. Then again the fact-finding commission may be carried on by "any inspector" appointed under section 237, not necessarily by the inspector or inspectors who was or were first appointed. The opinion formed by the inspector and incorporated in the report is merely an opinio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t authorities under the Companies Act have different objects. Section 209 deals with accounts and requires a company to keep different books, giving a true and fair view of the state of affairs of the company at the registered office of the company or at the branch office or offices. Power is invested in the Registrar of Companies or any officer authorised in this behalf to inspect the books, in order to see that the books are being kept and properly kept. There is further power in the Registrar, under section 234, to call for information in respect of documents submitted to him under the Act or representation made to him by contributories, creditors and others. There is also the power of investigation under section 237. The powers overlap at times but their objects are different. There is nothing to indicate that a power under the proviso to section 209(4) must not be exercised during investigation under section 237, even if exercise of such power becomes necessary. I am, however, prepared to agree with Mr. Deb that, in the circumstances of this case, the exercise of this power was unnecessary because such an inspection was possible to make during investigation and this order migh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 said Act also amended sub-sections (1) and (2) of section 637 of the Companies Act, 1956, and added a new sub-section (2A). After amendment, the sub-sections read as follows : "(1) The Central Government may by notification in the Official Gazette and subject to such conditions, restrictions and limitations as may be specified therein, delegate- (a) any of its powers or functions under this Act (other than the power to appoint a person as public trustee under section 153A and the power to make rules) to the Company Law Board ; (b) any of its powers or functions under this Act, other than those specified in sub-section (2), to such other authority or such officer as may be specified in the notification. (2) The powers and functions which cannot be delegated under clause (b) of sub-section (1) are those conferred by or mentioned in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to act. In support of the last contention Mr. Deb relied on the observations by Scott L.J. in Blackpool Corporation v . Locker [1948] 1 All. ER 85. This last contention of Mr. Deb was hotly contested by Mr. Chaudhuri. He contended that delegation was not equivalent to resignation by the executive. He generally relied upon Huth v. Clarke [1890] 25 QBD 391, 394 (per Lord Coleridge C. J.), Gordon, Dadds & Co. v . Morris [1945] 2 All. ER 616, 621 (per Linskey J.) and particularly upon the judgment of Denning L.J. in Metropolitan Borough and Town Clerk of Lewisham v. Roberts [1949] 2 KB 608, 622, in which his Lordship did not agree with the observations of Scott L. J. in Blackpool Corporation' s case (supra) and characterised the same as obiter. In my opinion, the form in which this point has been raised is somewhat of academic importance, in the context of this case. Whether the Central Government may now direct an investigation under section 237, to the exclusion of the Company Law Board, is not a matter for my consideration. What I have to consider is the fate of investigations, started at the instance of the Central Government, at a time when there was no Company Law Board. Do th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....find any substance in this argument. Although I have not been able to uphold the contentions of Mr. Deb, I feel, nevertheless, that the investigation so far carried on against the petitioner-company left much to be desired. An investigation against a public company tends to shake its credit and adversely affects its competitive position in the business world, even though, in the end, it may be completely exonerated and given a character certificate. Such an investigation may be justified only as a necessary evil. As such, it must be carried out quickly and in such a manner as may reduce the threat to the credit of the company to the minimum. Any investigation sought to be carried on oblivious of this aspect of the matter may tend to become unreasonably burdensome and may invite opposition. Then again, it must not be forgotten that during the time that an investigation is carried on, the company under investigation is not in the position of an accused and the persons in charge of the management of the company must not be treated as such. An inspector who starts investigation, as if riding on a high horse, is likely to antagonise the management and forfeit their co-operation. Sect....