TaxTMI 
TaxTMI 
2005 (3) TMI 477
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....housands of crores of rupees. These 16 appeals are challenging an order passed by the company law board under which it has ordered an investigation into one of such alleged scams under section 237(b)( i ) of the Companies Act which is being known as Ketan Parekh - Stock scam of 2001. 2. Few facts dealing with the complex question of law which have been raised by the appellant in the present proceedings are briefly narrated as under : 3. In 2001 there was a sudden crash in the stock market i.e., the sudden increase in the prices over the board securities in the period 1999-2000 and then sudden crash of the stock market is attributed and alleged to one Mr. Ketan Parekh. It is alleged that he by his conduct through his various entities and companies has committed fraud which led to the said crash in the stock market. It is also alleged that the 14 companies in the present appeals are entities which are controlled and owned directly or indirectly by the said Ketan Parekh, who is the alleged King-player in the stock exchange scam of 2001. There are also allegations that with the crash of the stock market, there has simultaneously been a crash of the Madhavpura Co-operative Bank, G....
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....ted under section 237(b)( i) is based on the material gathered from three basic sources namely, the report of the Joint Parliamentary Committee, the interim report of the SEBI investigation and thirdly the reports pursuant to the investigation under section 209A of the Companies Act. The petition which is filed on 2-5-2003 by the respondent in detail sets out the various findings on the aforesaid three reports and the material gathered by the said authorities as required for the purpose of carrying out investigation under section 237(b)( i ). This petition dated 2-5-2003 was served on the company on 16-5-2003. It is the case of the petitioner that on 20-7-2003 they applied to the Company Law Board for a certified true copy of the SEBI report and other documents which are relied upon by the respondent in the said company petition before the Company Law Board. On 12-7-2003 the appellant herein sought a transfer of the proceedings from the Principal Bench of the Company Law Board, New Delhi to the Western Region Bench of the Company Law Board at Mumbai. Simultaneously they have also applied for inspection of the various documents which are referred to and/or relied upon by the respond....
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....Act and therefore a further investigation in the matter by the said investigating authorities appointed by the Central Government under section 237(b)(i ) is neither necessary nor efficacious and it would only affect the interest of the appellant company prejudicially. The respondents on the other hand in their rejoinder have placed extensive reliance upon the inspection report of the CBI and Joint Parliamentary Committee and also the inspection carried out by the Department of Company Affairs under section 209(A). Even a certain extract of the JPC report has been annexed to the said rejoinder. 6. After hearing the parties the Company Law Board has passed an impugned order on 27-9-2004. By the impugned order the Company Law Board has inter alia held that there is a ground made out for carrying out investigation under section 237(b)( i). It has been further held that there are serious allegations of fraud and scams by these corporate entities and there is substantive material in support of the said allegations to conduct support the investigation under section 237(b)( i ) of the Companies Act. Thus the Company Law Board allowed the company petition and permitted the Department of....
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....at such inspection may be made without giving any previous notice to the company or any officer thereof: Provided further that the inspection by the Securities and Exchange Board of India shall be made in respect of matters covered under sections referred to in section 55A. (2) It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection under sub-section (1), all such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require of him within such time and at such place as he may specify. (3) It shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give. (4) The person making the inspection under this section may, during the course of inspection,- (i )make or cause to be made copies of books of account and other books and papers, or (ii)place or cause to be placed....
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.... the duty of the company, and of all persons who are the officer of the company, to furnish such information or explanation to the best of their power. (3) On receipt of a copy of an order under sub-section (1), it shall also be the duty of every person who has been an officer of the company to furnish such information or explanation to the best of his power. (3A) If no information or explanation is furnished within the time specified or if the information or explanation furnished is, in the opinion of the Registrar, inadequate, the Registrar may by another written order call on the company to produce before him for his inspection such books and papers as he considers necessary within such time as he may specify in the order; and it shall be the duty of the company, and of all persons who are officers of the company, to produce such books and papers. (4) If the company, or any such person as is referred to in sub-section (2) or (3), refuses or neglects to furnish any such information or explanation or if the company or any such person as is referred to in sub-section (3A) refuses or neglects to produce any such books and papers,- (a )the company and each such person sha....
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....ed in the order, within such time as he may specify therein; and the provisions of sub-sections (2), (3), 3(A), (4) and (6) of this section shall apply to such order. ** ** ** (8) The provisions of the section shall apply mutatis mutandis to documents which a liquidator, or a foreign company within the meaning of section 591, is required to file under this Act." "235. Investigation of the affairs of a company.-(1) The Central Government may, where a report has been made by the Registrar under sub-section (6) of section 234, or under sub-section (7) of that section, read with sub-section (6) thereof, appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct. (2) Where- (a )in the case of a company having a share capital, an application has been received from not less than two hundred members or from members holding not less than one-tenth of the total voting power therein, and (b)in the case of a company having no share capital, an application has been received from not less than one-fifth of the persons on the company's register of members, the Trib....
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....sed." 9. Learned counsel appearing for appellant has vehemently contended before me that the proceedings which are initiated by the respondent before the Company Law Board for investigation under section 237(b)( i) of the Companies Act is totally without jurisdiction and non est. It has been further contended that the condition precedent prescribed under the said section having not been complied with by the Company Law Board was not entitled in law to exercise jurisdiction under the provisions of section 237(b)( i ) of the Companies Act. The learned counsel has further contended that on true and correct interpretation the Company Law Board gets jurisdiction to pass an order of investigation only if the company is carrying on business with the intention to defraud its creditors, members and/or carrying on business for fraudulent or unlawful purpose or in a manner oppressive to any of its members in a praesentis. It is therefore contended that if the company is not carrying on business at present then irrespective of the fact that during the period when the company was carrying on business whether the company has conducted business defrauding the creditors or for a fraudulent or u....
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.... with law and therefore the said application for investigation when the business is not running in praesentis cannot be granted. 10. On the facts of the present case the learned counsel has contended that it is an admitted position that in respect of some of the appellants who are inter alia carrying on business of share brokerage their share brokers card has been suspended and in some of the cases the said card is revoked and/or terminated by the concerned stock exchange and SEBI and some of the trading firms who were carrying on business as a share broker have come to a halt and therefore those companies are not carrying on any business in praesentis and thus the jurisdiction vested under the Central Government and/or the Company Law Board to investigate under section 237(b)( i ) cannot be exercised in respect of these companies. It has been further contended that business of the various companies has also been closed because of the freezing of the bank accounts in parallel investigations which have been carried out by the SEBI, CBI and Department of Company Affairs. It has been therefore contended by the learned counsel for the appellant that even in respect of companies who ....
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.....' These words indicate that before the Central Government forms, its opinion it must have before it circumstances suggesting certain inferences. These inferences are of many kinds and it will be useful to make a mention of them here in a tabular form : (a )that the business is being conducted with intent to defraud- (i )creditors of the company (ii)members, or (iii)any other person; (b)that the business is being conducted (i )for a fraudulent purpose, (ii)for a unlawful purpose; (c )that persons who formed the company or manage its affairs have been guilty of- (i )fraud, or (ii)misfeasance or other misconduct-towards the company or towards any of its members; (d)that information has been withheld from the members about its affairs which might reasonably be expected, including calculation of commission payable to- (i )managing or other director, (ii)managing agent, (iii)the secretaries and treasurers, (iv)the managers. These grounds limit the jurisdiction of the Central Government. No jurisdiction outside the section which empowers the initiation of investigation, can be exercised. An action, not based on circumstances suggesting an i....
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....kind will not be valid; the formation of the opinion is subjective but the existence of the circumstances relevant to the inference of the enumerated kind will not be valid; the formation of the opinion is sine qua non or action must demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; the conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other words they held that although the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstratable; if their existence is questioned, it has to be proved at least prima facie; it is not sufficient to assert that those circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusions of certain definiteness; that conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct. In other word....
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....e persons mentioned in sub-clause (2) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the Courts are entitled to examine whether those circumstances were existing when the order was made. In other words, the existence of the circumstances in question are open to judicial review though the opinion formed by the Government is not amenable to review by the Courts. As held earlier the required circumstances did not exist in this case." 14. Apart from the aforesaid two judgments of the Apex Court the learned counsel has in support of his contention has also relied upon the judgment of the Delhi High Court in the case of Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 and the judgment of the Calcutta High Court in the case of New Central Jute Mills Co. Ltd. v. Dy. Secretary, Ministry of Finance, Department of Revenue & Company Law [1970] 40 Comp. Cas. 102 (Cal.). By relying upon the aforesaid two judgments the learned counsel has reiterated the submissions which are already set out in....
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....f. Insofar as the aforesaid authorities are concerned, the learned counsel for the respondent has contended that the judgment of the Apex Court in the case of Barium Chemicals Ltd. (supra) does not in any way or manner set out any such proposition of law as contended by the learned counsel for the respondent i.e. the company must be running the business in praesentis so as to attract the provisions of section 237(b)( i). The learned counsel has contended that the paras referred to by the learned counsel for the appellant did not carve out any such proposition of law as canvassed by the learned counsel for the appellant before this Court and therefore the said argument ought not to be accepted. The learned counsel has further contended that if the interpretation is given as suggested by the learned counsel for the appellant in most of the cases, then the company would commit fraud and carry on business for fraudulent or unlawful purpose and/or to defraud the creditors and before the same can be detected or investigated they would close down the company and evade investigation or cases where due to criminal investigation if the business of the companies has come to a halt then in tha....
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....ion does not raise any such issue of law. In the said paras the Apex Court was dealing with the issue of formation of opinion of the Central Government and requirement of the material in support thereof while ordering investigation under section 237(b)( i ) of the Act. The para clearly indicates that the court was considering the words in the opinion of the Central Government and was considering that whether such words suggest in any manner that there should be material in support. While considering the aforesaid issue the court has analysed the said sections and has broken in into four parts a, b, c and d therein. Such division of the section in four parts namely a, b, c and d is nothing else but division of the plain language of the section as it is. The learned counsel for the appellant has contended that the Apex Court while considering the section in parts (a) and (b ) as used the words 'business is being conducted' indicates that the court was of the opinion that the investigation cannot be ordered once the business has been closed down. I do not read any such proposition of law in the said para which has been set out in the said judgment nor do I find from the reading of the....
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....tention of the Legislature then in that event purposive interpretation ought to be resorted to and interpretation should be such to advance the intention of the Legislature rather than defeating the same. In my opinion the provisions of investigation under section 237( b)( i) are being introduced by the Parliament with the intention to prevent persons who enter the business in the guise of corporate entities to carry on fraudulent business with a view to harm the public interest. Butterworth in his 5th edition on the company law while tracing out the background of the similar legislation i.e. English Company Law has inter alia considered the reason for introduction of such a legislation and while doing so it has stated as under : "It is important to know the background of the legislation. It sometimes happens that public companies are conducted in a way which is beyond the control of the ordinary shareholders. The majority of the shares are in the hands of two or three individuals. These have control of the company's affairs. The other shareholders know little and/or told little. They receive the glossy annual reports. Most of them throw them into the wastepaper basket. There is....
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....igate all such cases of the company which are conducted in a fraudulent or unlawful purpose in a course when such conduct is being carried on by the company. I do not think this could be a legislative intention while enacting the said section 237(b)( i). 20. The principles of interpretation of statue are well settled. It is repeatedly held by the Apex Court that the interpretation must be to avoid absurdity and unrealistic result or consequences of such an interpretation. The Maxwell has in his book Interpretation of Statutes in the 10th edition as opined as under : "....if the choice is between two interpretation, the narrow of which would fails to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result." 21. The aforesaid rule of a meaningful and purposeful interpretation of the section to avoid the absurd consequence is by now well settled in the case of Mangin v. IRC [1971] All Eng. LR 179 Lord Donvan has stated as under : "Thirdly, the obje....
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....y be unjust does not entitle a court to refuse to give it effect. If there are two different interpretations of the words in an Act, the Court will adopt that which is just, reasonable and sensible rather than that which is none of those things. If the inconvenience is an absurd inconvenience, by reading an enactment in its ordinary sense, whereas if it is read in a manner in which it is capable, though not in an ordinary sense, there would not be any inconvenience at all; there would be reason why one should not read it according to its ordinary grammatical meaning. Where the words are plain the court would not make any alteration." (p. 338) 24. In the case of Molar Mal v. Kay Iron Works (P.) Ltd. [2000] 4 SCC 285 while reconsidering the aforesaid principle the Apex Court has held as under: "The Courts will have to follow the rule of literal construction which rule enjoins the Court to take the words as used by the Legislature and to give it the meaning which naturally implies. But, there is an exception to this rule. That exception comes into play when application of literal construction of the words in the statute leads to absurdity, inconsistency, or when it is shown that....
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....ed counsel for the respondent has been able to establish that the business of the company is not totally stopped though undoubtedly it has been seriously affected by virtue of the orders passed by the SEBI and stock exchange of suspension of the brokerage licence, suspension or freezer of bank account and collapse of Madhavpura Co-operative Bank and Global Trust Bank. The learned counsel has drawn my attention to the affidavit filed by the company before the Company Law Board in which it has been stated as under : "3(b) It is incumbent that in order to achieve this objective, the functioning of the Applicant/Respondent group of companies ought not to be crippled which situation would inevitably result if the order dated 27-9-2004 passed by this Hon'ble Board is not amended for the purpose of determining the real question, as would be evident from the averments made hereinafter in this application." "6. It is stated in this connection that the following the details of payment made by the Applicant group of companies and value of Share/Property lying with the Bank :- Particulars Amt. (Rs. in crores) By Cash/Deposits/Dividend 27.34 By sale of stocks 15.18 Pa....
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.... in Lakshminarayan Ram Gopal Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 that 'when a com-pany is incorporated it may not necessarily come into existence for the purpose of carrying on a business'. He further observed that 'the objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business.'" (p. 1518) 28. While considering the aforesaid contention the Apex Court has held that there is difference between the incorporation of a company and conduct of the business of the company. In this case the company was only incorporated on the paper but no business of any nature was conducted by the company. The said judgment has no application in the facts of the present case where the business of the company insofar as statutory requirements are concerned of calling meetings, filing returns, preparing the balance sheet is running. It may be that actual trading in the stock markets or stock exchanges has come to a halt by suspension of the trading licence by the SEBI or the business has been substantially crippled by virtue of freezer of various ba....
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....rder passed by the SEBI against the appellants and Ketan Parekh alleged moving spirit behind the 14 companies. The Central Government has also in support of the application relied upon the reports which are filed by the inspectors in the course of carrying out investigation under section 209(A). The Central Government has also relied upon large number of breaches of the provisions of the Companies Act by the various companies in support of investigation. In my view not only there is a material in the form of aforesaid reports, documents and orders but a more than prima facie case has been made out for investigation of the appellant company. The Joint Parliamentary Committee has in fact directed the investigation against these entities by the SEBI or the Central Government. However the learned counsel for the appellant canvassed that there is no material which can be used by the respondent in respect of the investigation because each of the authorities are entitled to conduct its own investigation on the basis of aforesaid report and, therefore, the same cannot be utilised for the purpose of ordering investigation by the Central Government under section 237(b )( i). I am not incline....
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....question of law which has been raised by the learned counsel for the appellant. 31. It has been inter alia contended that the power conferred under the provisions of section 237(b)( i) of the Act must be sparingly exercised and cannot be utilised in casual manner. It has been contended by the learned counsel for the appellant that in respect of the so called security scam of 2001 there are already investigations undertaken by the SEBI, CBI and even the Department of Company Affairs by ordering investigation under section 209(A). It has therefore been contended that on the same material and on the same allegations one more investigation ought not to be ordered by the Central Government nor the Company Law Board ought to grant a sanction to such an investigation. It is not contended that the said exercise is in futility and the same is carried on simultaneously by the various authorities with a view to only affect the business of the company and thus the same should not be permitted. 32. Learned counsel for the appellant has taken me through the provisions of the SEBI Act and has contended that the purpose and scope of inquiry thereunder has been more extensive and the provisio....
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....in. It has been contended that the SEBI under the SEBI Act has a restrictive power to investigate i.e., in respect of security transactions but when it comes to transaction in respect of banks and other institutions which are not within the purview and/or jurisdiction of the SEBI and the same are required to be investigated by the Central Government through the appropriate authority and/or body. It has been contended that the inquiry under the different acts by the different authorities are in respect of their respective jurisdiction and spheres assigned to them under the various legislations and it cannot be stated in law that merely because the inquiry is in progress by one authority under one act it should automatically prevent the other authorities from conducting investigation under a separate statue. 33. I have considered these rival submissions of the parties and I am of the opinion that the jurisdiction and the power of the various investigating authorities derived from the jurisdiction vested in them by the various legislations or statutes, the authority which is doing the inquiry and/or conducting the investigation is required to carry out investigation keeping in mind....
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....r ensuring probity in the management of companies affairs. That of course is in the public interest. Since the Secretary of State's powers under section 432(2) are exercisable where there are circumstances suggesting fraud, it is likely that in many cases where inspectors are appointed an investigation by the police or the Serious Fraud Office could also be appropriate. But the code under the 1985 Act is a separate code even though it may overlap the field of criminal investigation." 34. Apart from the aforesaid position in law : I am also of the further opinion that the Central Government having constituted the Serious Fraud Investigation Office and if it desires to carry out investigation in respect of the affairs of the aforesaid 14 appellant companies without any mala fide intention then it is not possible to stall the investigation merely on the basis of contentions and arguments advanced by the learned counsel for the appellant that all the authorities cannot be permitted to carry the investigation simultaneously in respect of the very same material. I therefore, reject the contention on behalf of the appellant in respect of question No. 3 which have been formulated. I am ....