Bombay High Court
Hariganga Cement Ltd. vs Company Law Hoard And Another on 17 December, 1986
Equivalent citations: 1987(2)BOMCR250, [1988]64COMPCAS603(BOM)
JUDGMENT S.W. Puranik, J.
1. The petitioner-M/s. Hariganga Cement Limited-is a public limited company duly incorporate and registered under the Companies At, 1956, and this petition by the said company is directed against the common order bearing reference No.20/1/86-CL-I, dated July 31,1986, passed by respondent No.1, the Company Law Board, in a petition filed before it under section 250 read with section 237 and 147 of the Companies Act, 1956, as well as a petition filed under sections 408 and 409 of the Companies Act,1956. By the said impugned order, the Company Law Board had directed investigation into the affairs of the petitioner company (hereinafter referred to as "the company") under section 237 of the Companies Act, while dismissing the application under section 408 and 409 of the Companies Act, and partially allowing the application under section 237,247 and 250 of the Companies Act.
2. Brief facts leading to the present petition may be stated as follows:
The petitioner-company was promoted for setting up a mini cement plant in Chandrapur District of Maharashtra State and was incorporated in March, 1979. The plant had been set up and had gone into production from the end of June, 1986. The said company is financed by various ment Bank of India (IDBI), Industrial Credit and Investment Corporation of India Ltd, (ICICI), Industrial Finance Corporation India (IFCI) and Investment Corporation of Maharashtra Ltd.
3. One Shri T.L.Arora, a non-resident Indian, was the director of the said company from June, 1981, to March, 1986, and is also a shareholder holding 20,000 equity shares in his own name and 20,000 equity shares held by him jointly with his wife. The said Shri Arora, it is alleged by the company, started creating difficulties in the management of the company with the sole object of taking over the control and management of the company. It is further alleged that he retired from the office of the director by rotation on March 31,1986, and failed to get himself re-elected to the board of directors. It is then alleged by the company that the said Arora and his associates went to the extent of proposing a resolution at the annual general meeting held on March 31,1986, for the removal of Shri G.R.Agarwal, chairman and Shri O.P.Agarwal, director, of the company who were the main promoters of the petitioner company, and sought to get two of his associates as diectrs in the resulting vacanies. The said resolution failed as it could not be be proposed and seconded.
4. As already stated above, the annual general metting of the company was scheduled on March 31,1986, when one Shri K.R.Batra, another shareholder, filed an application under section 237,247 and 250 of the Companies Act before the Company Law Beard. Shri T.L.Arora also filed an application under section 408 and 409 of the Companies Act. The allegation made in these application were substantially the same. Some of the allegations made in the above applications may be stated as follows:
(1) that the chairman and his brother had diverted funds of the company and siphoned of the same through a series of transaction to other sister concerns;
(2) That the annual general meeting of March 31,1986, was misconducted; and (3) That Shri G.R.Agarwal had invested over Rs.25 lakhs in the names of poor and illiterate villagers of Jeetpura, Haryana, in the sums of Rs.10,000 to Rs.25,000 each, even though those persons had no resources. It is, therefore, Shri G.R.Agarwal, who is actively controlling the affairs of the company on the basis of such bogus shares.
5. To substantial these allegation, the said Arora had collected signatures and thumb impressions and statements from the said villagers who have stated that they had never applied for such shares.
6. Respondent No.1, the Company Law Board, on hearing both th parties, passed the following order:
"25. In regard to the manintainablity of an application under section 409 of the Act, the condition precedent is that the application should be made either by a director, managing director or other persons holding certain positions as mentioned in section 409. Since Shri Arora did not hold any of these positions at the relevant time and it has also not been shown that any of his co-applicants held the same when the application was made, it is clear that the said application is not maintainable.
26. With regard to the application under section 408, it may be mentioned that applicant No.2 has not been able to prove most of the allegations and in particular the one relating to advances of Rs.1.64 corers said to have been given to companies connected with Shri G.R.Agarwal. The remaining transactions have been reasonably explained by the respondents. It is also significant that the financial institutions are actively associating themselves with conducting the affairs of the company and have suggested professionalisation of the board of directors, described in para. 11, supra, and appointment of concurrent suitors. These should adequately take care of proclivity, if any towards mismanagement and we do not think if any further preventive action under section 408 of the Companies Act, is warranted... "
7. It may not be applies to mention her that before the above order was passed by respondent No.1, the Company Law Board, the petitioner- company who was respondent therein had been duly served notice and they had filed their detailed statement and explanations before the Company Law Board. All the allegations in the application of Mr.Arora and Batra, were denied. The Company Law Board, while rejecting both the applications of Mr.Arora and Batra, made only one adverse observation to the effect that satisfactory answers to the allegations that a large number of villagers had been pure up as a front by Sri G.R.Agarwal have not been furnished. Thus, it appears to be the only reason given by the Company Law Board that it was not satisfied with the replies given on behalf of th petitioner-company.
8. We have detailed the findings arrived at by respondent No.1, the Company Law Board, from paragraphs 25 and 26 of its order, wherein it may be noticed that the application under section 409 of the Companies Act was not maintainable and in regard to the other applications under section 408, it was stated that the applicant have not been able to prove most of their allegation, while the remaining transaction have been reasonably explained by the responded therein. The Company Law Board had also taken into account all the facts that financial institutions were actively associating themselves with the affairs of the company and that these should adequately take care of property, if any, towards mismanagement and that no furtur preventive action under section 408 of the Companies Act is warranted.
9. In spite of the above categorical finding, the Company Law Board, in para 27 of the impugned order states as follows:
"27. However, in regard to the request for investigation under sections 237, 247 and 250, satisfactory answers to the allegation that a large number of villagers had been put up as a front by Shri G.R.Agarwal have not been furnished. It is also seen that the IDBI ordered some investigation into the affairs of the company. Therefore, a probe, interalia, into th related issued of purchase of shares by the villagers seems necessary. Since this is an important point on which we are not satisfied with the replies from the company, we feel necessary that the affairs of the company should be investigated with a view to ascertain the correctness or otherwise of the various allegation made in the petitions including the aforesaid."
10. An operative order the impugened order, however, states that "there are circumstances suggesting that the persons concerned in the management of its affairs have been guilty of misconduct towards the company, and some of its members, more specifically, certain villagers of Jeetpura in Haryana; and whereas the Company Law Board considered it necessary to appoint an inspector to investigate into the affairs of the company and report thereon ...... hereby appoints Shri V.Govindan, Joint Director (Inspection), Department of Company Affairs, Shastri Bhavan, New Delhi, as inspector to investigate into the affairs of the company and to report to the Company Law Board........."
11. It is to be noted that even in the finausions in paragraph 27, the Board had held that no satisfactory answer was given in respect of benami shareholders, and that a probe, inter alia, into the related issue of purchase of shares by the said villagers seems necessary. The Board further directed that the affairs of the company should be investigated with a view to ascertain the correctness or otherwise of the various allegations made in the petitions including the aforesaid.
12. Shri V.R.Manohar, learned counsel for the petitioner-company, attacked the impugned order as arbitrary, whimsical, irrational and perverse. He criticised the same as an order which is a result of total non- application of mind on the part of respondent No.1. He also contended that on the basis of the available facts and circumstances which were placed before respondent No.1-Board, it was impossible for any reasonable person, much less the Company Law Board, to opine there from suggestive of the things mentioned in clauses (i), (ii) and (iii) of section 237(b) of the companies Act. According to the petitioner, the impugned order certainly is contrary to the findings recorded by respondent No.1, Company Law Board, itself. The impugned order has also no nexus with the finding recorded in the body of the impugned order. Further, no reasonable body of person, properly versed in law, could have passed the impugned order and, hence, the impugned order can be branched as arbitrary and capricious.
13. Shri Ramesh Darda, learned counsel for the respondents, Company Law Board, and the Union of India, supported the impugned order. According to him, there were sufficient circumstances and facts brought on record, which were sufficient for the Board to act and direct investigation into the affairs of the company. In so far as the contention of the petitioner-company that while in the body of the order the Board had decide to order inquiry only in respect of the bogus shares held benami in the names of villagers in Haryana, yet the final order directs investigation into the entire affairs of the company, is concerned, Shri Darda stated that apart from the said allegations and documents of the villagers, two application of Shri Arora and Batra were also before the Board contending several allegation and documents of the villagers, two application of Shri Arora and Batra were also before the Board contending several allegation in the matter of management of the affairs of the company. He further submitted that the subjective satisfaction arrived at by the Board on the basis of these facts cannot be challenged before this court. At the time of hearing of this petition, we had secured the records and papers which were before respondent No.1, when it had passed impugned order. With the assistances of both counsel, we have perused all the documents in detail.
14. Some of the preparing the orders passed by the Company Law Board under section 237(b) of the Companies Act may be borne in mind. The earlier view of the Supreme Court in State of Madras v. C.P.Sarathy, , was not approved subsequently. In the said decision in 1953, the Supreme Court had held that "whenever a provision of law confers certain power on an authority on its forming a certain opinion on the basis of certain facts, the courts are preclude from examining whether the relevant fact on the basis of which the opinion is said to have been formed in fact existed." This decision in 1953 has been overruled by the subsequent decision of the Supreme Court in the matter of Rohtas Industries Ltd. v.S.D.Agarwal , in which the Supreme Court have observed that the 1953 decision cannot be considered as authority for this preposition. It was further held by the Supreme Court, approving the decision in Barium Chemicals' case that (at page 800 of 39 Comp Cas): "...the existence of circumstances suggesting that th company's business was being conducted as laid down in sub-clause (i) or the person mentioned in sub-clause (ii) were quite 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 weather those circumstances were existing when the order was made. In other words, the existence of the circumstances in question is open to judicial review though the opinion formed by the Government is not amenable to review by the courts". Thus, even though the subjective opinion formed by the Company Law Board is not amenable to challenge, the judicial courts can certainly look at the circumstances as to whether they were existing, of if they were existing, whether they had any nexus with the opinion formed by the Company Law Board.
15. It is well settled that the discretionary powers under section 237(b) of the Companies Act must be exercised honestly and not for corrupt or ulterior purposes. The authority must form the requist it opinion honestly and after applying its mind to the relevant material before it. In exercising the discretion, the authority must have regard only toe circumstances suggestion one or more of the matters specified in sub clauses (i), (ii) and (iii) of section 237(b) of the Companies Act. It must act reasonably and not capriciously or arbitrarily. It will be an absurd exercise of discretion, if, for example, the authority forms the request opinion on the ground the the director in charge of the company is a member of a particular community. Within these narrow limits, the opinion is not conclusive and can be challenged in a court of law. (paragraph 45 of Rohtas Industries Ltd.'s case ). The Supreme Court has also observed in the above case at paragraph 46 (at page 803) that : "It 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."
16. On perusal of the records and papers, we find that the application of Shri Bata and Arora have been rejected and could not be considered as they were not supported by affidavits. However, the Company Law Board seems to have relied upon the so called documents or statements of some villagers from Haryana, inter alia, contending that they had never applied for th shares of the petitioner-company nor had they contributed any amount. The true copes of the said documents are at annexures E.F.G. and C to this petition. Scrutiny of the said documents show that the affidavits are not by the shareholders. Some o the affidavits are not even sworn and are mere chits bearing thumb impression or signatures of the villagers. Such documents, in our opinion, cannot form the basis of even the purported existence of any material before the Company Law Board.
17. In the return filed on behalf of respondent No.1, the Company Law Board, it had been sought to be contended that apart from the documents purporting to be contended that apart from the documents purporting to be the statements of the benami village shareholders, two application of S/Shri Batra and Arora were also before the Board, which contained serious allegations regarding mismanagement of the affairs of the petitioner-company. Shri Darda, learned counsel for the respondents, has also taken the same stand during his arguments. we do not find that such a contention can be accepted at all, for the simple reason that the speaking order passed by the Board at annexure A clearly brushed aside the application filed by Bater and Arora, and they have categorically concluded that most of the allegations in the applications were not substantiated, whereas the remaining allegations have been duly explained by the company. The only material, on the basis of which the impugned order is passed, is the statement of the villagers from Haryana and if that is the only circumstance which was in existence at th time of the passing of the opinion by the Board, then no additional circumstance can be placed now during the arguments or in the return. The opinion formed by the Board is squarely based only on the statement of the alleged villagers from Haryana, and we have already found that the said statements have no nexus with the mismanagement of the affairs of the affairs of the petitioner- company. In fact, even if the allegation in the villagers' statement may be true, it may amount only to an fence by the individual person concerned, who has secured the benami shares in the name of the said villagers. It does not reflect on the management of the affairs of the company. For such an act of holding unauthorised benami shares, there are independent provision under the Companies Act for taking action against such shareholder who has secured benami shares.
18. The discretionary p vested in the Company Law Board under section 237(b) of the Companies Act are of a very wide nature and the said powers have to be exercised with great cirumspection and retrospection and in a judicious manner. The powers under section 237 have been conferred on the Central Government in the faith that it will be exercised in a reasonable manner. The Department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore, the standard that is prescribed under section 237(b) is not the standard required of an ordinary citizen by that of an expert. Hence, if the court comes to the conclusion that no reasonable authority would have passed the impugned order on the material before it, then th same is liable to be struck down.
19. The formation of the opinion under section 237 of the Companies Act by the Central Government is subjective, but the existence of circumstances relevant to the inference as the sine que non for action must be demonstrable. It is not reasonable to say that the clause permits the Government to say that it has formed the opinion on circumstances which, it thinks, exist. Sice the existence of "circumstances" is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned in court, has to be proved at last prima facie. It is nor sufficient to say that circumstances exist but give no clause as to what they are, because the circumstances must be such as to lead to a conclusion of certain definitions. When it is challenged that the opinion has been formed mala fide or upon extraneous or irrelevant matters, the respondets must disclose before the court, the circumstance which will indicate that his action was within the four corners of his own powers.
20. We have already that none of the circumstances which could have led to the conclusion arrived at by respondent No.1-Board were in existence. On the other hand, we have seen from the return and from the oral submission of learned counsel for respondents that certain reasons have been added now to substantial the opinion formed by respondent No.1-Board. Such reasons, stated afterwards, cannot justify the order in retrospect, if they were not available to the authority at the time of exercising its posers in arriving at the opinion. In fact, other circumstances which were before the court were already considered and rejected.
21. As stated earlier by us, even though wide powers have been conferred on respondent No.1, the Company Law Board, yet they must be exercised in a reasonable manner. It is pertinent to note that such an order has an adverse effect on the reputation and credibility of the petitioner company and may cause grave prejudice to its affairs and may also give rise to consequences which could not be allowed to take place at the cost of the petitioner-company's interest. The Company Law Board, in its speaking order (annexure A) has also observed that several financial institutions, such as, IDBI, ICICI, IFCI, etc., have actule associated themselves with the management of the company, and are duly represented on the board of directors and that should take adequate care of any proclivity, if any, towards is management of the company.
22. In view of the above discussion, we have no hesitation to strike down the impugned order at annexure A and its operative part appointing an Inspector for investigation into the affairs of the petitioner company.
23. In the result, the writ petition is allowed. Rule made absolute as above. In the circumstances of the case, there shall be no order as to costs.