Gujarat High Court
Deodatt Purshottam Patel vs Alembic Glass Industries Ltd. on 2 August, 1971
Author: D.A. Desai
Bench: D.A. Desai
JUDGMENT D.A. Desai, J.
1. The petitioner is a shareholder of Alembic Glass Industries Ltd., Baroda, a company incorporated on 19th December, 1944, under the provisions of the Companies Act, 1913, as prevalent in the former Baroda State. The petition is filed under section 237(a)(ii) of the Companies Act, 1956, praying for two reliefs :
"(i) to pass appropriate order or direction regarding the investigation to be made by appointing investigator and/or auditors to inquire into and report regarding the affairs and the conduct of the company including the transaction of purchases since 1966; and
(ii) to direct the Central Government to order investigation under section 237 of the Companies Act."
2. Number of allegations have been made in the petition alleging that the business of the company is being conducted with intent to defraud its creditors, members or any other persons and is otherwise fraudulent and in a manner oppressive to its members. The allegations can be broadly summarised under three heads :
(i) that the managing agents have without the permission or sanction of the board of directors purchased capital assets in excess of the prescribed limit and also sold the capital assets in excess of the prescribed limits, such as purchase of aeroplane, setting up of the plant at Bangalore and purchase and sale of one Ambassador car :
(ii) flagrant violation of the provisions contained in section 372 by purchasing the shares of Alemic Chemical Works Company Ltd. and M/s. Dharak Ltd.; and
(iii) purchases at inflated price from certain specified in which Mr. Ramanbhai B. Amin, a partner of the firm of managing agents, namely, Nishechi Services, has vital interest. The petitioner has further stated that he has brought all these malpractices to the notice of the Central Government and requested the Central Government to take action under section 237 of the Companies Act to appoint an inspector to investigate into the affairs of the company, but the Central Government has neither taken any action nor cared to inform him what action it proposed to take in respect of the allegations made by the petitioner in his applications and letters sent by him to the Central Government. The petitioner has stated that therefore he has been constrained to file this petition under section 237(a)(ii) for the aforementioned reliefs.
3. On the petition being presented a notice prior to its admission was ordered to be issued to the company in response to which the respondent appeared and filed a short affidavit, inter alia, contending that this court has no jurisdiction to entertain the petition under section 237(a)(ii) of the Companies Act.
4. Section 237 of the Companies Act reads as under :
"237. Investigation of company's affairs in other cases. - Without prejudice to its powers under section 235, the Central Government -
(a) shall 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, if -
(i) the company, by special resolution; or
(ii) the court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government; and
(b) may do so 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 creditors, 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 fraudulent or unlawful purpose; or
(ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or
(iii) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager, of the company."
5. Group of sections commencing from section 235 and ending with section 251 are grouped together under the heading "Investigation". Section 235 confers power upon the Central Government to appoint an inspector to investigate the affairs of any company and to report thereon in such manner as the Central Government may direct in the circumstances mentioned in the section, namely :
(a) in the case of a company having a share capital, on the application either of not less than 200 members or of members holding not less than one-tenth of the total voting power therein;
(b) in the case of a company not having a share capital, on the application of not less than one-fifth in number of the persons on the company's register of members;
(c) in the case of any company, on a report by the Registrar under bus-section (6) or sub-section (7) read with sub-section (6) of section 234.
6. Section 236 prescribes the manner of making the application as provided for by section 235. Under section 237, obligate the affairs of the company if -
(i) the company adopts a special resolution to that effect and conveys it to the Central Government; or
(ii) the court by its order director the Central Government to appoint an inspector to investigate into the affairs of a company.
7. Clause (b) of section 237 enables the Central Government to suo motu appoint an inspector to investigate the affairs of a company if the conditions set out in one other of the sub-clauses of clause (b) are satisfied. By the present petition, the petitioner has invoked the jurisdiction of this court under section 237(a)(ii).
8. The learned Advocate-General appearing for the company contended that this court has no jurisdiction to appoint an inspector to investigate the affairs of the company and, therefore, prayer (a) in the petition is beyond the jurisdiction of this court. It must straightaway be conceded that under section 237 this court has no jurisdiction to appoint an inspector to investigate the affairs of any company. Looking to the scheme of the sections commencing from section 235, it is crystal clear that the power to appoint an inspector to investigate the affairs of any company vests in the Central Government. The Central Government can be moved to exercise that power in the manner provided for in section 235 by a requisite number of members or by the Registrar. Even in that case, the Central Government is not bound to appoint an inspector. Clause (b) of section 237 enables the Central Government to appoint an inspector to investigate the affairs of the company suo motu. However, that power can be exercised on the subjective satisfaction of the Central Government with regard to all or any of the matters set out in the three sub-clauses (b). The Central Government is under an obligation to appoint an inspector if one or the other conditions specified in clause (a) of section 237 is satisfied. Two conditions are;
(i) that the company adopts a special resolution to that effect; or
(ii) that the court by its order directs the Central Government to appoint an inspector.
9. Section 237 leaves no room for doubt that this court exercising jurisdiction under the Companies Act has no power to appoint an inspector. Therefore, prayer (a) by which the petitioner wants this court to appoint an inspector cannot be granted.
10. It was next urged that prayer (b) is premature. By prayer (b) the petitioner wants this court to direct the Central Government to appoint an inspector to investigate the affairs of the company. As the first limb of the argument it was urged that even according to the allegations made by the petitioner he has already approached the Central Government to appoint in inspector and as that application has not been finally decided, this court should not proceed to make any order under section 237(a)(ii) even if it has jurisdiction to pass such order. It is undoubtedly true that the petitioner has approached the Central Government and has sent various applications, letters and affidavits requesting the Central Government to take action against the company in exercise of the powers conferred upon the Central Government under section 237(b). But at this stage, on the demur, the question is : whether this court has or has no jurisdiction to entertain an application under section 237(a)(ii) and in an appropriate case to make an order directing the Central Government to appoint an inspector. That the court, in its wisdom, in a given case, may not pass an order under section 237(a)(ii) unless the party has first approached the Central Government drawing its attention to various malpractices committed in the administration of the affairs of the company and after the Central Government declines to take action under section 237(b). This will immediately raise a question : whether the powers conferred upon the court under section 237(a)(ii) can only be exercised after the Central Government has declined to exercise power under section 237(b). In other words, is it obligatory or incumbent upon a party before approaching this court under section 237(a)(ii) to first approach the Central Government and only after the Central Government declines to take any action, this court's jurisdiction can be invoked and the court can exercise jurisdiction under section 237(a)(ii). The construction of clause (a) of section 237 suggested by the learned Advocate-General would make the approach to the Central Government under section 237(b) a condition precedent to the court exercising jurisdiction under section 237(a)(ii). There is no warrant for this construction. There is nothing in the language of section 237 which indicates that a person invoking the court's jurisdiction under section 237(a)(ii) must, first, as a necessary condition before coming to the court, approach the Central Government, invite the attention of the Central Government to the various malpractices committed in the administration of the affairs of the company, and only after the Central Government declines to take any action in the matter, that he can invoke this court's jurisdiction under section 237(a)(ii). That would be, in fact, putting a fetter upon the power of this court, which the section does not provide, nor should the court by necessary implication read into section 237 any such fetter on the power of this court. Let it be distinctly understood that the court may in a given case decline to exercise jurisdiction under section 237(a)(ii) till the Central Government disposes of the matter pending before it under section 237(b); but that is entirely different from saying that no one can come to this court unless he first approaches the Central Government under section 237(b). That would be unduly limiting the jurisdiction of the court which the legislature has not thought fit to put, to delimit or circumscribe.
11. The language of section 237(a) is clear and unambiguous and admits of no construction by which any fetter or limit can be put on the jurisdiction of this court to entertain a petition for giving a direction to the Central Government to appoint an inspector to investigate the affairs of the company. Once the court makes an order, it is obligatory upon the Central Government to appoint an inspector. There are three distinct methods by which a party desirous of getting the affairs of company investigated may get an inspector appointed by the Central Government. If the requisite number of members are available, application can be made under section 235, Any one who is unable to collect the requisite number of members may bring to the notice of the Central Government various malpractices committed in the administration of the affairs of a company and the Central Government may act suo motu under section 237(b). In the aforementioned two cases the question of appointment of an inspector is within the discretion of the Central Government. But there is a third mode legislatively recognised and mandatory in character by which an inspector can be got appointed by and Central Government and that is where the special resolution to that effect is adopted by the company, or where the court makes an order to that effect.
12. The legislature has conferred wide jurisdiction on this court to entertain a petition under section 237(a)(ii). In fact, the power of the Central Government to appoint an inspector suo motu under section 237(b) is limited to its subjective satisfaction in respect of one or other matters contained in three sub-clauses of clause (b). The legislature in its wisdom has not put any such condition before the court can make an order, though the court may in its wisdom expect prima facie proof of some of these conditions on the subjective satisfaction of which the Central Government would appoint an inspector before directing the Central government to appoint an inspector. While conferring jurisdiction on the court to direct the Central Government to appoint an inspector, the legislature has not thought fit to circumscribe the discretion or jurisdiction in any manner. It would, therefore, be utterly inappropriate to curtail or circumscribe or fetter the jurisdiction of this court by reading into the section something which is not there.
13. The learned Advocate-General, however, in support of the construction canvassed for by him, urged that section 237 must be read subject to section 235 or section 237(b). It was urged that only if a requisite number of members gathered together as required by section 235 and approached the Central Government or anyone can draw the attention of the Central Government to the affairs of the company under section 237(b), on the Central Government being satisfied about one or the other thing set out in the three clauses of section 237(b), the Central Government may appoint an inspector. It is, therefore, not possible to conceive that the legislature would confer such wide jurisdiction upon the court under section 237(a)(ii), as to enable anyone to bypass these two sections. It was also urged that wherever the legislature wanted a single person to come to the court to take action against the company, it has in terms so provided. But, in all other cases, action against the company being representative action, one or the other individual should not be permitted to invoke the jurisdiction of the court which would have the tendency to open the flood-gates of litigation. As a corollary, it was urged that a petition under sections 397 and 398 for reliefs against oppression of minority shareholders can only be filed if and only if certain number of members gather together and come to the court as required by section 399. Approaching the matter from this angle and proceeding further, it was urged that it would not be appropriate to read section 237 in isolation but it must be read subject to section 235. The scheme of sections 235, 236 and 237 is quite clear and unambiguous. The requisite number of members can request the Central Government to appoint an inspector. The legislature also conferred power upon the Central Government to appoint an inspector suo motu. But the legislature also thought fit to confer jurisdiction on the court to examine the allegation against a company even at the instance of a single shareholder, and, if satisfied, to direct the Central Government to appoint an inspector. By putting this construction, which appears to be grammatically correct and in consonance with the spirit of section 237, there should be no apprehension of opening the flood-gates of litigation. Whenever the court directs a thing to be done, there is judicious investigation of allegations by a judicially trained mind and reason is the hallmark of judicial approach, fairplay and moderation. A party who comes to this court requesting the court to direct the Central Government to appoint an inspector will have to satisfy the judicial conscience that there has been such Mal-administration in the affairs of the company, and the some one should at least look into the malpractices. In my opinion, the apprehension appears to be unfounded. Therefore, it appears that neither section 235 nor section 237 controls section 237(a)(ii) and this court has jurisdiction to entertain a petition under section 237(a)(ii) notwithstanding the fact that the party invoking the jurisdiction of this court has not approached the Central Government and notwithstanding the fact that the Central Government has taken no action on such an application already made to it. The petition, therefore, cannot be said to be premature or liable to be thrown out on this ground.
14. The learned Advocate-General invited my attention to the practice in England in respect of an application made under section 165 which is a corresponding section in the English Companies Act, 1948. It was urged that the practice as grown up in England does indicate that an application under section 165 (a) (ii) which is in pari materia with section 237(a)(ii) will not be entertained until the party coming to the court has first approached the board of trade and the board of trade has refused to appoint an inspector. My attention was drawn to Palmer's Company Law, 21st edition, page 683, where the author has observed as under :
"If the board of trade refuse to appoint an inspector, a member may apply to the court for an order under section 165 (a) (ii)."
15. From this observation, an attempt was made to urge that approaching the board of trade is condition precedent to the court exercising jurisdiction under section 165 (a) (ii). The observation cannot be construed to that effect because of an earlier observation in the same Chapter at page 681. There the author has observed as under :
"An application for an order is made by originating motion (R.S.C. 1965, Ord. 102, r. 4). Such an order may further be made by the court of its own motion in any proceeding before it."
16. Pennington on Company law, at page 557, has observed :
"The board of trade must appoint an inspector to investigate the affairs of company if a meeting of its members by special resolution, or the court, by order, declares that its affairs ought to be so investigated."
17. It is further observed that, thus, if an individual member fails to persuade the board to appoint an inspector, of its own motion, or if the requisite fraction of members fails to persuade the board to do so, an application may be made to the court to reverse the board's decision. Gower, in his Principles of Modern Company Law, third edition, at page 606, has observed as under :
"It is very uncommon for an application to be made to the court for an order since it is cheaper, quicker and normally easier to apply direct to the board to exercise their power under section 165(b)."
18. It thus appears that even though ordinarily a single shareholder would be too unwilling to take proceedings in a court of law invoking the court's jurisdiction under section 237(a)(ii) and therefor, would prefer to go to the Central Government, yet there is nothing in the language of the section or in the practice indicated hereinabove to led to the conclusion that no one can come to the court without first going to the Central Government. Entertaining of an application directly by the court without insisting upon the applicant going to the Central Government would not indicate that thereby the individual is allowed to bypass some of the statutory provisions of law.
19. It was next urged that the court can make an order as envisaged by section 237(a)(ii) not by entertaining an independent petition from any petitioner but the court, while examining the affairs of the company in respect of some other proceedings against the same company, may in order to give full relief and to effectively adjudicate upon the issues raised before it direct the Central Government to appoint an inspector. It was urged that one cannot conceive of an application simpliciter under section 237(a)(ii) for directing appointment of an inspector by the Central Government but power under section 237(a)(ii) can only be exercised where the court has seizin upon the affairs of a company on account of some other proceeding pending in the court against that company. I fail to see anything in the language of section 237(a)(ii) indicating that a petition simpliciter for an action under section 237(a)(ii) cannot be entertained but that power conferred by section 237(a)(ii) can only be exercised by the court against the company in respect of whom other proceeding is pending in the court and the court considers it proper to direct appointment of an inspector. My attention was drawn to the commentary by A. Ramaiya in A Guide to the Companies Act, sixth edition, page 408, where the author has observed that the order of the court referred to in clause (a) (ii) may be passed in any proceeding in which the court has seizin of the company's affairs. This commentary cannot be read to mean that existence or pendency of some proceeding other than the court would have seizin over the affairs of the company and then alone in such a proceeding, in order to effectively dispose of that proceeding, the powers under section 237(a)(ii) can be exercised. On the contrary; it only indicates that even in the absence of a petition simpliciter for an action under section 237(a)(ii) for directing the Central Government to appoint an inspector, the court while hearing some other proceeding against a company in the course of which the court is satisfied that an inspector to investigate the affairs of the company should be appointed, the court may without any application to that effect proceed to pass such an order. If the court has such wide power to exercise jurisdiction under section 237(a)(ii) in another proceeding against the same company, there is no justification for holding that a petition simpliciter under section 237(a)(ii) cannot be entertained by the court. Viewed from this angle, the observations of the Allahabad High Court in Raghunath Swarup Mathur v. Har Swarup Mathur would not be of any assistance. In that case, while dismissing a petition under section 397 and 398, it was observed that no case is made out for making an order under section 237(a)(ii).
20. Lastly, I would also like to point out that rule 11(9) of the Companies (Court) Rules, 1959, provides that the court can be moved under section 237 by a petition. That, of course, is not decisive. But if the construction that I put upon section 237 is correct, the fact that a petition is prescribed for moving the court may also point in the same direction.
21. Thus, upon a proper construction of section 237, a petition can be filed under section 237(a)(ii) of the Companies Act for a prayer that the Central Government be directed to appoint an inspector to investigate the affairs of the company. Prayer (b) is to that effect and, therefore, the petition is one which can be entertained.
22. As no further facts have been set out in the affidavit, the petition is accepted and admitted and notice of the petition should be issued to the company. Costs of this hearing would be costs in the cause.