TaxTMI 
TaxTMI 
1968 (12) TMI 50
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....up capital little more than six crores. It was incorporated in the year 1933. The impugned order reads : "No. 2(4)-CL. I/63, Government of India, Ministry of Commerce and Industry, Department of Company Law Administration. ORDER Whereas the Central Government is of the opinion that there are circumstances suggesting that the business of Rohtas Industries Limited, a company having its registered office at Dalmianagar, Bihar (hereinafter referred to as the said company), is being conducted with intent to defraud its creditors, members or other persons and the persons concerned in the management of its affairs have in connection therewith been guilty of fraud, misfeasance, or other misconduct towards the said company or its members. And whereas the Central Government consider it desirable that an Inspector should be appointed to investigate the affairs of the said company and to report thereon. Now, therefore, in exercise of the several 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 appoint Shri S. Prakash Chopra of Messrs. S. P. Chopra & Co., Chartered Accountants 31, C....
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.... therein : "5. I say that the true facts are as under- (a) Shri S. P. Jain together with his friends, relations and associates is principally in charge of the management of the petitioner-company. Over a long period, several complaints had been received by the Department, as to the misconduct of the said Shri S. P. Jain towards companies under his control and management. Some of these wore referred to and enquired into by a Commission of Inquiry headed by Mr. Justice Vivian Bose of the Supreme Court of India, which in its report dated 15th June, 1962, made adverse findings and observations against Shri S. P. Jain. Shri S. P. Jain is being prosecuted in the Court of the District Magistrate, Delhi, under section 120B read with sections 409, 465, 467 and 477 of the Indian Penal Code in regard to his misconduct in the management of what are known as the Dalmia Jain group of companies, and most of the material upon the basis of which this prosecution was launched was available to the Central Government on 11th April, 1963. Shri Jain is also being prosecuted in Calcutta for misconduct in the management of Messrs. New Central Jute Mills Co. Ltd., a company under the same management ....
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....ot have been the basis for making the impugned order. Therefore, it is not necessary to refer to them in extenso. One of the concrete allegations made therein- on which allegation alone some half-hearted reliance was placed at the hearing-is that though the appellant-company had a debenture capital of Rs. 48,50,000, on 31st December, 1939, Shreeram Harjimal, a father concern of Dalmia Jain group, had pledged in various banks debentures of the appellant-company of the value of Rs. 1,07,47,000 and raised a loan of nearly rupees one crore. According to the complaint this must have been done by forging some demands. The complaint further stated that the appellant-company has facilitated that fraud by paying interest on the entire loan borrowed. The above allegation has been denied by the appellant in the reply affidavit filed on its behalf. The Attorney-Gereral conceded that the impugned order could not have been made on the basis of this allegation as it directed an enquiry into the company's affairs primarily for the period subsequent to 1st April, 1958, and the allegation in question relates to transactions that took place in about the year 1939 but at the same time he contended tha....
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....ed that the inquiry in question was directed against the New Central Jute Mills Co. Ltd. and not against the appellant-company. The Regional Director submitted his report on November 10, 1961. In his report he opined that the transaction complained of is of a doubtful character and therefore further inquiry is desirable. Thereafter, on December 2, 1961, the Under-Secretary to the Government of India wrote to the Regional Director asking for some further information. One of the points on which information was called for was whether Sahu Jain's Companies (other than New Central Jute Mills Co. Ltd., who were holding 3,000 shares of Albion Plywoods Ltd.) had also transferred their shares to Bagla and Co./Poddar and Sons and to give full details thereof. The Regional Director was also asked to report whether the preference shares of the Albion Plywoods Ltd. carried any voting rights before conversion. In that letter it was further observed : "In this regard it is suggested that discreet enquiries may be made to find out the names of the partners of Bagla and Company and Poddar and Sons and also whether the said brokers were actively associated with the Sahu Jains. If considered neces....
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....to the Attorney-General the only circumstance on the basis of which the Government passed the impugned order was the sale of 3,000 preference shares of Albion Plywoods Ltd. held by the appellant-company though, according to him, the Government viewed that circumstance in the background of the various complaints received by it against Mr. S. P Jain who was at that time one of the prominent directors of the appellant-company, New Central Jute Mills Co. Ltd. and Albion Plywoods Ltd., as well as the report made by the Vivian Bose Commission which inquired into the affairs of some of the companies with which Mr. S. P. Jain was connected. Admittedly, the Vivian Bose Commission did not inquire into the affairs of the appellant-company nor does its report contain anything about the working of that company nor was there any complaint against the appellant-company excepting that made in annexure "A". On the basis of the above facts we have now to see whether the Government was competent to pass the impugned order. Sections 235 to 237 of the Act are allied sections and they form a scheme. They deal with the investigation of the affairs of the company. To find out the true scope of section ....
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....nts have good reason for requiring the investigation, and the Central Government may, before appointing an inspector, require the applicant to give security for such amount not exceeding Rs. 1,000 as it may think fit for payment of the costs of the investigation. From the provisions contained in sections 235 and 236 it is clear that the legislature considered that investigation into the affairs of a company is a very serious matter and it should not be ordered except on good grounds. It is true that the investigation under section 237(b) is of a fact-finding nature. The report submitted by the inspector does not bind anybody. The Government is not required to act on the basis of that report, the company has to be called upon to have its say in the matter but yet the risk-it may be a grave one-is that the appointment of an inspector is likely to receive much press publicity as a result of which the reputation and prospects of the company may be adversely affected. It should not therefore be ordered except on satisfactory grounds. Before taking action under section 237(b)( i) and (ii), the Central Government has to form an opinion that there are circumstances suggesting that the b....
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....subjective, the existence of circumstances set out in clause (b) is a condition precedent to the formation of such opinion and therefore the fact that the impugned order contains recitals of the existence of those circumstances, does not preclude the court from going behind those recitals and determining whether they did in fact exist and further whether the Central Government in making that order had taken into consideration any extraneous consideration. But according to the learned Attorney-General the power conferred on the Central Government under clause (b) of section 237 is a discretionary power and the opinion formed, if in fact an opinion as required by that section has been formed, as well as the basis on which that opinion has been formed are not open to judicial review. In other words according to the learned Attorney-General no part of section 237(b) is open to judicial review ; the matter is exclusively within the discretion of the Central Government and the statement that the Central Government had formed the required opinion is conclusive of the matter. Courts both in this country as well as in other Commonwealth countries had occasion to consider the scope of ....
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....udholkar J. held that the power conferred on the Central Government under section 237(b) is a discretionary power and no facet of that power is open to judicial review. Our brother, Bachawat J., the other learned judge in that Bench, did not express any opinion on this aspect of the case. Under these circumstances it has become necessary for us to sort out the requirements of section 23 7(b) and to see which of the two contradictory conclusions reached in Barium Chemicals' case [1966] 36 Comp. Cas. 639; [1966] Supp. SCR 311, in our judgment, is according to law. But, before proceeding to analyse section 237(b), we should like to refer to certain decisions cited at the Bar bearing on the question under consideration. We shall first take up the decisions read to us by the learned Attorney-General. In State of Madras v. C. P. Sarathy [ 1953] SCR S34, 346-47; AIR 1953 SC 53 this court was called upon to consider the scope of section 10(1) of the Industrial Disputes Act, 1947. There the question for decision was whether the opinion formed by the State Government that there existed an industrial dispute is open to judicial review. While dealing with that question this court observe....
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....the ground that the power conferred on the Reserve Bank is a reasonable restraint taking into consideration the interests of the public and the position occupied by the Reserve Bank in the financial system of this country. We do not think that this decision bears on the point under consideration. In Hubli Electricity Co. Ltd. v. Province of Bombay [1949] L.R. 76 I.A. 57; AIR 1949 PC 136, 139 the Judicial Committee came to the conclusion that the opinion to be formed by the Provincial Government under section 4(1) of the Indian Electricity Act, 1910, is a subjective opinion and the same cannot be adjudged by applying objective tests. The relevant portion of section 4(1) reads : "The Provincial Government may, if in its opinion the public interest so requires, revoke a licence in any of the following cases, namely :- (a) where the licensee, in the opinion of the Provincial Government, makes wilful and unreasonably prolonged default in doing anything required of him by or under this Act........". Dealing with the scope of that provision their Lordships observed : "Their Lordships are unable to see that there is anything in the language of the sub-section or in the subje....
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....ER. 338 and Greene v. Home Secretary [1941] 3 All. ER 388 which considered the validity of detentions during war time. Those decisions cannot serve as real guide for interpreting the provision of law with which we are concerned. We shall now refer to the decisions relied on by the appellant. As long back as 1891 the House of Lords was called upon to consider the scope of some of the provisions of the Licencing Act, 1872, which gave discretion to the Magistrates in granting certain licences. The question for decision was as to the nature of the discretion granted. Lord Halsbury L. C, speaking for the House, observed in Susannah Sharp v. Wakefield [1891] AC 173,179: "...'discretion' means when it is said that something is to be done within the discretion of the authorities that that something is to be done according to the rules of reason and justice, not according to private opinion : Rooke's case 5 Rep. 100, a ; according to law, and not humour. It is to be, not arbitrary, vague, and fanciful, but legal and regular". In Nakkuda Ali v. M.F.De S. Jayaratne [1951] A.C. 66, 77 the Judicial Committee, in interpreting the words " where the Controller has reasonable grounds to....
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....1965, he gave reasons which included that (in effect) his main duty had been to decide the suitability of the complaint for such investigation but that it was one which raised wide issues and which he did not consider suitable for such investigation, as it could be settled through arrangements available to producers and the board within the milk marketing scheme : that he had unfettered discretion, and that, if the complaint were upheld by the committee, he might be expected to make a statutory order to give effect to the committee's recommendations. Section 19(3)( b) of the Agricultural Marketing Act, 1958, read : "A committee of investigation shall-........ be charged with the duty, if the Minister in any case so directs, of considering, and reporting to the Minister on, any report made by a consumers' committee and any complaint made to the Minister as to the operation of any scheme which, in the opinion of the Minister, could not be considered by a consumers' committee under the last foregoing subsection". The appeal was allowed by the House of Lords (Lord Morris of Borth-Y-Gest dissenting). Lord Reid and Lord Pearce held that, where a statute conferring a discretion on a....
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....ved [1968] AC 997, 1058: "My Lords, on the basic principles of law to be applied there was no real difference of opinion, the great question being how they should be applied to this case. The Minister in exercising his powers and duties, conferred on him by statute, can only be controlled by a prerogative order which will only issue if he acts unlawfully. Unlawful behaviour by the Minister may be stated with sufficient accuracy for the purposes of the present appeal (and here I adopt the classification of Lord Parker C.J., in the Divisional Court): (a) by an outright refusal to consider the relevant matter, or (b) by misdirecting himself in point of law, or (c) by faking into account some wholly irrelevant or extraneous consideration, or (d) by wholly omitting to take into account a relevant consideration. There is ample authority for these propositions which were not challenged in argument. In practice they merge into one another and ultimately it becomes a question whether for one reason or another the Minister has acted unlawfully in the sense of misdirecting himself in law, that is, not merely in respect of some point of law but by failing to observe the other headings which....
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....ny or cancel such a privilege lies within the ' discretion ' of the Commission; but that means that decision is to be based upon a weighing of considerations pertinent to the object of the administration. In public regulation of this sort there is no such thing as absolute and untrammelled 'discretion', that is, that action can be taken on any ground or for any reason that can be suggested to the mind of the administrator; no legislative Act can, without express language, be taken to contemplate an unlimited arbitrary power exercisable for any purpose, however capricious or irrelevant, regardless of the nature or purpose of the statute. Fraud and corruption in the Commission may not be mentioned in such statutes but they are always implied as exceptions. 'Discretion' necessarily implies good faith in discharging public duty ; there is always a perspective within which a statute is intended to operate ; and any clear departure from its lines or objects is just as objectionable as fraud or corruption. Could an applicant be refused a permit because he had been born in another province, or because of the colour of his hair ? The ordinary language of the legislature cannot be so dist....
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....vernment is not amenable to review by the courts. As held earlier, the required circumstances did not exist in this case. The next question is whether any reasonable authority, much less an expert body like the Central Government, could have reasonably made the impugned order on the basis of the material before it. Admittedly, the only relevant material on the basis of which the impugned order can be said to have been made is the transaction of sale of preference shares of Albion Plywoods Ltd. At the time when the Government made the impugned order, it did not know the market quotation for the ordinary share of that company as on the date of the sale of those shares or immediately before that date. They did not care to find out that information. Hence there was no material before them showing that they were sold for inadequate consideration. If as is now proved that the market price of those shares on or about May 6, 1960, was only Rs. 11 per share then the transaction in question could not have afforded any basis for forming the opinion required by section 237(b). If the market price of an ordinary share of that company on or about May 6, 1960, was only Rs. 11 it was quite reas....
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.... the court so directs. The court has a discretion to direct the investigation on being satisfied that the affairs of the company should be investigated : In re Miles Aircraft Ltd. ( No. 2) [1948] W.N. 178. The investigation is a fact-finding inquiry and its object is to ascertain whether in fact malpracties have been committed in relation to the company's affairs: see Raja Narayanlal Bansilal v. Manek Phiroz Mistry [1960] 30 Comp. Cas. 644; [1961] 1 SCR 417, 430-6. On a consideration of the inspector's report, the Government can take appropriate action against the delirquents under sections 242, 243 and 244. Section 237(b) provides that the Central Government may appoint one or more competent persons as inspectors to investigate the affairs of the company and to report thereon in such manner as the Central Government may direct, "if, in the opinion of the Central Government, there are circumstances suggesting- (i)that the business of the company is being conducted with intent to defraud its creditor", members, or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudul....
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....dia [1962] 32 Comp. Cas. 514; [1962] Supp. 3 SCR 632. Section 237(b) is not violative of articles 14 and 19. If it is established that there were no materials upon which the authority could form the requisite opinion the court may infer that the authority did not apply its mind to the relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under section 237(b) is not fulfilled. On this ground I interfered with the order under section 237(b) in Barium Chemicals v. Company Law Board [1966] 36 Comp. Cas. 639; [1966] Supp. 1 SCR 311. Let me recall the words of section 237(b): "If, in the opinion of the Central Government, there are circumstances suggesting..". The relevant matter is "the opinion of the Central Government". The condition precedent to the exercise of power under section 237(b) is the opinion of the Government and not the existence of the circumstances suggesting one or more of the specified matters. To hold that the factual existence of such matters is a condition precedent to the exercise of the power is to re-write the section. Section 237(b) must be interpreted in the light of its own language and subject-ma....
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....ly prolonged default. On that point the opinion is the determining matter, and-if it is not for good cause displaced as a relevant opinion- it is conclusive". The opinion is displaced as a relevant opinion if it could not be formed by any sensible person on the material before him. The reason is that the court may then infer that the authority either did not honestly form the opinion or that in forming it, it did not apply its mind to the relevant facts. In Ross-Clunis v. Papadopoullos [1958] 2 All. ER. 23 ; [1958] 1 WLR 546, 560 (PC) the Commissioner of Limassol imposed a fine on the Greek Cypriot inhabitants in the area after holding an inquiry under regulation 5 of the Cyprus Emergency Powers (Collective Punishment) Regulations, 1955, which provided that "in holding inquiries under these regulations, the commissioner shall satisfy himself that the inhabitants of the said area are given adequate opportunity of understanding the subject-matter of the inquiry and making representations thereon". The Privy Council upheld the commissioner's order and set aside the order of certiorari quashing it. With regard to the contention of the commissioner that the only duty cast on him was ....
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....ng requisition of premises, "if it appears to that authority to be necessary or expedient so to do in the interest of public safety, etc". the court could not investigate the grounds or reasonableness of the decision in the absence of an allegation of bad faith. These decisions on emergency legislation stand on a peculiar footing. The courts are not inclined to fetter executive action when the country is being raided by the enemy. They show that the subject-matter of the statute has a material bearing on its construction. To give another example, the courts are not inclined to interfere with orders of reference of industrial disputes: see State of Madras v. C.P. Sarathy [1953] SCR 334, 346-47, Swadeshi Cotton Mills Co. Ltd. v. State of U. P. [1962] 1 SCR 422; 20 F. J.R. 325, but even such orders are not immune from judicial review: see State of Bombay v. K. P. Krishnan [1961] 1 SCR 227. Let us now turn to the facts of the present case. The Central Government passed the impugned order under section 237(b) on May 11, 1963. The order recited: "Whereas the Central Government is of the opinion that there are circumstances suggesting that the business of Rohtas Industries Limited, ....
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....the management of New Central Jute Mills Co. Ltd. and Rohtas Industries Ltd. New that the preference shares would be converted into ordinary shares. As a matter of fact Albion Plywoods Ltd., by a special resolution passed on May 20, 1960, converted 5,000 preference shares into 50,0OO ordinary shares and M/s. Sahu Jains were appointed as its managing agents. The market price of an ordinary share as shown in the Indian Finance was Rs. 14 on May 13, 1960, Rs. 15.44 on May 20, 1960, Rs. 17 on May 27, 1960, Rs. 17 on June 10, 1960, and Rs. 14 on June 17, 1960. The charge is that the management of Rohtas Industries Ltd. sold the preference shares at an undervalue with a view to benefit the managing agents, their friends and brokers knowing fully well that on conversion into ordinary shares they would fetch a much higher price. The charge was originally made with regard to the sale of 2,000 preference shares held by New Central Jute Mills Co. Ltd., in a letter dated January 27, 1961, addressed by a complainant to the Secretary to the Government of India, Department of Company Law Administration. In the course of investigation into this charge, the Regional Director, Company Law Administra....