Calcutta High Court
Peerless General Finance And ... vs Union Of India (Uoi) on 1 July, 1988
Equivalent citations: [1991]71COMPCAS300(CAL), 93CWN134
JUDGMENT Bhagabati Prasad Banerjee, J.
1. The petitioners in this writ application challenged the validity of the show-cause notice dated March 13, 1987, and June 24, 1987, as also the order dated November 13, 1987, passed by the Company Law. Board, Ministry of Industry, Government of India, New Delhi, under Section 408 of the Companies Act, 1956 (referred to as "the said Act"). By the show-cause notice dated March 13, 1987, which is annexure "A" to the petition, the petitioner, Peerless General Finance and Investment Co, Ltd., was directed to show cause why the Government directors should not be appointed in the company under Section 408(1) of the Companies Act, 1956, on the ground that it had come to the notice of the board that the Hon'ble Supreme Court of India, in their judgment in Civil Appeal No. 3563 of 1986, Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., [1987] 61 Comp Cas 663 had made some observations for which the action under Section 408 of the said Act were to be taken by appointing Government directors in the company. The said observations were as follows (at pages 667 and 668 of 61 Comp Cas) :
"(a) the yield will be very much lower than the 6 per cent. compound interest or 7 per cent, simple interest that we mentioned earlier. The subscriber is always at the losing end . . .
(b) . . . the company advertises its schemes widely in beguiling terms . . .
(c) This field staff appears to be chosen for their social, political or official connections . . . the first subscription is literally shared between the company and its agents . . .
(d) The majority of the subscribers commit default after the first year and only a few of the depositors continue their subscriptions and keep alive the certificates. This gives us an indication as to the class of depositors who are principally contacted and are perhaps intended to be so contacted. Having regard to the class of depositors and the incentives offered to agents for securing fresh business, neglect and default of renewal subscriptions is an inevitable result. The agents are interested in securing fresh business because of the high rate of commission in regard to fresh business and are loathe to waste their time on collecting subsequent years' subscriptions fetching far less commission. . . "
2. The other ground on which the action was proposed to be taken in this behalf was that it had come to the notice of the Company Law Board that "the present managing director of the company, Shri P. C. Sen, who enjoys substantial powers of management in the company has, on January 10, 1987, been dismissed from service under Rule 23(g) of the Burn Standard Company Limited Conduct, Discipline and Appeal Rules, 1976, for charges such as exercising financial powers in excess of his competence, and other acts of misconduct, and that it would appear prima facie that the appointment of Shri P. C. Sen, as above, may not be in the interest of the company and public interest.
3. The petitioner-company submitted a reply to the said show-cause notice on March 31, 1987, disclosing the reasons and/or grounds for which the proposed action was challenged. In the said reply, it was specifically pointed out that no action could be taken on the alleged ground of Shri P. C. Sen's termination from service from Burn Standard Co. Ltd. inasmuch as it was stated that there had been an injunction granted by the Division Bench of this court in F.M.A.T. No. 173-76 of 1987, by which the Union of India and the officers of Burn Standard Co. were restrained from taking further action pursuant to the purported order of dismissal passed against Shri P. C. Sen until disposal of all the appeals and until further orders of the Hon'ble High Court and that the said appeal was still pending. After the petitioner-company had pointed out to the respondents about the interim order of injunction with regard to Mr. P. C. Sen, managing director of the company, the Company Law Board, by its letter dated June 8, 1987, informed the petitioners that, in view of the observation made by the Division Bench of this court in the said appeal, the Company Law Board would not proceed v/ith the grounds relating to Shri P. C. Sen and the relevant passage in the show-cause notice dated March 13, 1987, was accordingly dropped.
4. Thereafter, the matter was heard by the Company Law Board and ultimately, the Company Law Board passed an order on November 13, 1987, under Section 408(1) of the Companies Act, by which four directors were appointed in the board of the petitioner-company for a period of three years from the date they assumed charge of their office under Section 408(1) of the Companies Act, 1956. In the said show-cause notice, it was alleged that action was proposed to be taken pursuant to some observations made by the Supreme Court of India in the case of Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. [1987] 61 Comp Cas 663 (SC) ; AIR 1987 SC 1023. The relevant observations made by the Supreme Court of India upon which the respondent relied had been set out in the show-cause notice dated March 13, 1987. It may be mentioned that the Supreme Court, in its judgment, ordered that the appeals filed by the Reserve Bank of India, the Union of India and the State of West Bengal are, accordingly, dismissed. It is open to them to take such steps as are open to them in law to regulate schemes such as those run by the Peerless Company to prevent exploitation of ignorant subscribers. Care must also be taken to protect the thousands of employees. We must also record our dissatisfaction with some of the schemes of the Life Insurance Corporation which appear to us to be even less advantageous to subscribers than the Peerless scheme. We suggest that there should be a complete ban on forfeiture clauses which hit hardest the classes of people who need security and protection most. We have explained this earlier and we do wonder whether the weaker Sections of the people are not being made to pay the more affluent sections. Robbing Peter to pay Paul ?
5. Mr. Somenath Chatterjee, followed by Mr. S. B. Mukherjee, learned counsel appearing on behalf of the petitioners, submitted that the conditions precedent for invoking the provisions of Section 408 of the Companies Act was wholly absent and non-existent in this case. Section 408 of the Companies Act provides that :
"Notwithstanding anything contained in this Act, the Central Government may appoint such number of persons as the Central Government may, by order in writing, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interest to hold office as directors thereof for such period, not exceeding three years on any one occasion, as it may think fit, if the Central Government, of its own motion or on the application of not less than one hundred members of the company or of members of the company holding not less than one-tenth of the total voting power therein, is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company from being conducted either in a manner which is oppressive to any member of the company or in a manner which is prejudicial to the interests of the company or to public interest."
6. It was contended in the first place that, in order to invoke the power under Section 408 of the Companies Act, the Central Government must be satisfied that the appointments of directors were required to be made in order to prevent the affairs of the company from being conducted either in a manner which is oppressive to any member of the company or in a manner which is prejudicial to the interest of the company or to public interest.
7. In order to show that the materials on record before the Company Law Board could not establish, by any stretch of imagination, that the affairs of the company were being conducted in a manner which was oppressive to any member of the company or in a manner which was prejudicial to the interest of the company or to public interest, learned counsel appearing on behalf of the petitioners has stated the following facts in connection with the allegations contained in the show-cause notice :
That, immediately after the order was passed by the Hon'ble Supreme Court of India, the Reserve Bank of India considered the matter of public interest and issued directions in exercise of the powers conferred under Sections 46J and 46K of the Reserve Bank of India Act, 1934, and reference was made to Clause 5 of the said Directions regarding minimum rate of return, Clause 6 relating to security of deposit, Clause 10 dealing with register of deposit, Clause 13, Clause 16 and Clause 19 which were relevant to the scheme as are run by the petitioner-company. It was stated that the said Directions issued by the Reserve Bank of India have provided elaborate provisions for securing the interest of all depositors. Immediately after the Reserve Bank of India issued the directions as stated above, the petitioner-company made an application to the Reserve Bank of India for granting exemption from the provision of the said directions under Clause 19 of the said Directions which provides power to the Reserve Bank of India to grant exemption from all or any of the provisions of the said schemes and that the said application for exemption was considered by the Reserve Bank of India but, ultimately, the same was dismissed. After the said application was dismissed by the Reserve Bank of India, the petitioner-company informed the Reserve Bank of India that they would be complying with those directions of the Reserve Bank of India after making adjustment in the scheme framed by the petitioner-company in this behalf. It is the case of the petitioner-company that some of the features of the company's scheme which were commented upon by the Hon'ble Supreme Court of India have since been improved and/or shortcomings removed. It was further submitted that the Supreme Court commented only with regard to the scheme of the company which had nothing to do with the management of the petitioner-company. It was stated that the Supreme Court gave liberty to the Government of India that it would be open to them in law to regulate the schemes such as those run by the petitioner-company to prevent exploitation of ignorant subscribers. The petitioners replied to the points raised in the show-cause notice as under :
(a) Yield.--It was stated that the present subscribers to the schemes of the petitioner-company got a return at the rate of 10% compound interest on their deposits, which is the rate of interest prescribed by Clause 5 of the said Directions issued by the Reserve Bank of India in 1987, A copy of the current brochure published by the petitioner-company advertising the different schemes offered to the public was placed before the Company Law Board.
(b) Advertisements.--The norms regarding advertisements have already been laid down in the said Directions of 1987 in Clause 16. The petitioner-company had not departed from nor violated the said norms in the matter of publishing advertisements and is, in fact, scrupulously following the same.
(c) Choice of members of the field staff.--The petitioner-company stated that the observations of the Hon'ble Supreme Court of India appeared to have been based on the list of commission agents annexed to the report of the Inspector appointed by the Reserve Bank of India. Such report is said to have been made some time in 1979. Most of the persons whose names appeared in the said list have ceased to be the commission agents of the company. At present, and after the coming into force of the said 1987 Directions of the Reserve Bank of India, the petitioner-company was keeping in deposit the entire amount of the first year's subscriptions and no part of it was being transferred to its profit and loss account.
(d) Lapse of deposits made by defaulting subscribers.--It was stated that the forfeiture Clause which was commented upon by the Hon'ble Supreme Court of India had been deleted from all the schemes of the company with effect from November 3, and the same was recorded in the judgment of the Hon'ble Supreme Court. The attention of the Board was invited to pages 8 and 13 of the copy of the judgment of the Hon'ble Supreme Court of India which was submitted before the Company Law Board at the personal hearing and it was stated that thus there was no longer any question of the company enriching itself by lapse of certificates. The said Directions of the Reserve Bank of India issued in 1987 did not contain any provisions nor do they fix any ceiling on the rate of commission to be paid to the company's agents. In any event, it was stated that the petitioner-company had substantially reduced the commission paid to its agents.
8. Mr. Somnath Chatterjee, learned counsel appearing on behalf of the petitioners, also referred to and relied upon some questions that were raised in the Rajya Sabha and the answers given by the Minister of State in the Ministry of Finance. The questions were as follows :
(a) Whether the Peerless General Finance and Investment Co. Ltd. is functioning satisfactorily within the general directions issued by the Government of India from time to time.
(b) Whether it is a fact that the various schemes run by the company did not give some benefit to the members of the investing public.
(c) If so, whether the Government proposed to scrutinise the various schemes and persuaded the company to improve the terms and conditions of those schemes.
9. The answers to all those questions were given together and the following answers were given by the Minister of State in the Ministry of Finance in the Rajya Sabha that the Reserve Bank of India had issued fresh Directions in May, 1987, known as "Residuary Non-Banking Company" (R. B. I. Directions, 1987) which are applicable to the schemes conducted by Peerless General Finance and Investment Co. Ltd. Those Directions, inter alia, provided for the minimum and maximum period for which deposits can be accepted, the rate of interest, bonus and/or other advantage by whatsoever name called payable on those deposits and the manner in which the deposits are to be invested. These Directions are considered essential to provide the said return on the investment and security to the depositors. The Reserve Bank of India has reported that the Peerless General Finance and Investment Co. Ltd. has brought out two new schemes in 1987. A perusal of the new schemes reveals that the rate of interest is payable and the periods of deposits are in accordance with the Directions of the Reserve Bank of India. These answers which were given by the Minister concerned before the Rajya Sabha were relied on by Mr. Chatterjee in support of his contention that the Government of India admitted before Parliament that the Reserve Bank of India issued Directions for regulating the said schemes in public interest and that it was found that the petitioner-company was acting in accordance with the Directions of the Reserve Bank of India in this behalf which was issued by the Reserve Bank of India for regulating the said schemes in the interest of the depositors. It was submitted by Mr. Somenath Chatterjee that the petitioner-company was administering a financial scheme and the Reserve Bank of India is the only authority who is competent under the law to issue the Directions with regard to the said scheme under the law in this behalf and as a matter of fact, the Reserve Bank of India had issued Directions in public interest with regard to the said scheme and that when the petitioner-company had duly complied with all the conditions and restrictions imposed under the said Directions, the Company Law Board had no jurisdiction in law to regulate the said scheme to prevent exploitation of ignorant subscribers. It was further pointed out by Mr. Chatterjee, learned counsel appearing on behalf of the petitioners, that in clause 18 of the said Directions issued by the Reserve Bank of India, it was provided that Clauses 4 and 5 of the said Directions should not apply to deposits received or to be received under or in respect of any certificates, units and/or other instruments issued or sold before the commencement of the said Directions.
10. Relying on the provisions of Clause 18 of the said Directions, it was contended by Mr. Chatterjee that the same validly protected the arrangements made by the petitioner-company before the issue of those Directions with regard to the deposits received or to be received under or in respect of any certificates, units and/or instruments issued or sold before the commencement of the said Directions. In this connection, Mr. Chatterjee, learned counsel appearing on behalf of the petitioners, relied on the provisions of Section 58B of the Reserve Bank of India Act to show that, in case any directions and orders issued by the Reserve Bank of India are not carried out by anybody, the persons concerned were guilty of such violation and are liable to be punished by imprisonment. Mr. Chattterjee further contended that in the show-cause notice four specific observations of the Hon'ble Supreme Court of India were disclosed and/or relied on and that the petitioner-company was directed to show cause why, on the basis of those observations, action contemplated under Section 408 of the Companies Act should not be taken against the petitioner-company. The Company Law Board, over and above those four observations made by the Hon'ble Supreme Court of India, had also taken into consideration some grounds which were not disclosed in the show-cause notice and these are : (a) failure on the part of the company to carry out the Directions issued by the Reserve Bank of India in 1967, (b) payment of high commission and bonus, etc., in the first year's subscription to the agents, and that (c) in the recent past, the company was either under lock-out or frequently closed due to strike.
11. The petitioner-company submitted a reply to the show-cause notice and, at the time of hearing of the matter before the Company Law Board, Mr. S. B. Mukherjee, learned advocate who appeared on behalf of the petitioners, wanted to submit a written submission but the members of the Company Law Board insisted on filing of the said written submission on an affidavit containing the written submission made by the petitioner-company and the same is not in dispute. The said affidavit had been annexed to the writ petition as annexure "G" to the petition. In the said affidavit to which a written submission was filed, it was, inter alia, stated that "it is submitted that the Hon'ble Supreme Court of India, in the course of its judgment, observed that the scheme of the company would be regulated by appropriate legal measures. The Reserve Bank of India has issued the said 1987 Directions in exercise of its statutory powers with the sole purpose of regulating the schemes of the company. The company is now in a position to comply with the said Directions. The scheme which the company is now conducting cannot, therefore, in any case, be said to be prejudicial to the public interest. In the face of such statement being made on affidavit, the Company Law Board, in its final order dated November 13, 1987, held that "it has also been stated before us on behalf of the company that it is not possible to comply with those Directions without adjustment".
12. The Company Law Board, by the order and judgment dated November 13, 1987, held that even though, under the new scheme, the company has prescribed a return of 10 per cent. compound interest on deposits, it collected substantial deposits against fresh certificates for a term of 10 years or more under its old scheme after coming into force of the Reserve Bank of India Directions. Mr. Chatterjee submitted in this connection that this was expressly permitted by the Reserve Bank of India under Clause 18 of the said Directions as hereinbefore mentioned. Secondly, it was held that a very high rate of commission in the first year and a much lower rate in the subsequent years could result in agents not being interested in collecting subscription during the subsequent years. Mr. Chatterjee, learned counsel appearing on behalf of the petitioner-company, contended that this is nothing but a mere speculation as to what would happen in the subsequent years and this aspect of the matter is fully covered by the Directions of the Reserve Bank of India issued in this behalf. Thirdly, it was pointed out that the provisions contained in the Reserve Bank of India's Directions seek to prevent the company from diverting the first year's and subsequent years' subscriptions collected from depositors as income.
13. It was contended by Mr. Chatterjee that the petitioner-company after the coming into force of the Directions of the Reserve Bank of India, is keeping in deposit, the entire amount of first year's subscriptions and no part of it was being transferred to the profit and loss account. It was suggested that the Company Law Board did not apply their mind to this aspect of the matter and acted arbitrarily and contrary to the materials and information on record.
14. Next, the Company Law Board pointed out that it was not possible on the part of the petitioner-company to comply with the Directions of the Reserve Bank of India in this behalf to which Mr. Chatterjee contended that these allegations were wholly misconceived, inasmuch as, after the petitioner-company failed to get exemption in terms of Clause 19 of the Directions, the petitioner-company informed the Reserve Bank of India that it would comply with the same and in this regard, an affidavit was filed before the Board containing such statements and this finding was made by the Company Law Board ignoring the statements of fact submitted on affidavit before the Company Law Board and that it was further submitted that there was no material in the possession of the Company Law Board to show that the petitioner-company failed or refused to comply with the Directions of the Reserve Bank of India or that it was not possible on their part to comply with the same.
15. Mr. Somenath Chatterjee, learned counsel appearing on behalf of the petitioners, contended that the Supreme Court of India, in the judgment, observed that (at page 694 of 61 Comp Cas) "it is open to them to take such steps as are open to them in law to regulate schemes such as those run by Peerless Co. to prevent exploitation of ignorant subscribers. Care must also be taken to protect the thousands of employees. . ."
16. On the basis of the observations made by the Hon'ble Supreme Court of India, Mr. Chatterjee submitted that the respondents can take steps only in accordance with law to regulate the schemes which are run by the petitioner-company and, as a matter of fact, when the Reserve Bank of India which is the only statutory and the appropriate authority in this behalf have issued Directions for the purpose of regulating the schemes run by the petitioner-company, the Company Law Board had no jurisdiction whatsoever to take action under cover of the Directions issued by the Supreme Court of India. Mr. Chatterjee pointed out that the Supreme Court made some observations so that the scheme is run in such a manner by which the depositors' interest are not prejudicially affected and that the scheme is run in such a fashion that it makes the company's position viable. Mr. Chatterjee submitted that the proceedings initiated by the Company Law Board under Section 408 and the order passed under Section 408 of the Companies Act were without any jurisdiction and/or without the authority of law, inasmuch as, it was beyond the scope and ambit of the provisions of Section 408 of the Companies Act to pass any order which might regulate the said scheme to prevent innocent subscribers from being exploited. The Company Law Board has been given power under Section 408 of the Companies Act to appoint directors in any company on the existence of the condition precedent laid down in that section. But, in the instant case, the Company Law Board had decided to take action only on the basis of some observations made by the Supreme Court in the said judgment in Civil Appeal No. 3563 of 1986, etc.--Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. [1987] 61 Comp Cas 663 (SC). It is submitted that the Hon'ble Supreme Court did not grant any liberty to the Company law Board for invoking the provisions of Section 408 of the Companies Act in the facts and circumstances of this case.
17. Mr. Sanjoy Kumar Bhattacharjee, learned counsel appearing on behalf of the respondent submitted that the action taken by the Company Law Board in this behalf was taken on the basis of the observations made by the Supreme Court of India and pursuant to the liberty granted to the respondents in this behalf. It was submitted that, on the basis of the materials on record, the Company Law Board was fully satisfied that it was necessary with a view to prevent the company's affairs from being conducted in a manner which is prejudicial to the interest of the company and to the public interest both jointly and severally and that was the reason why the Company Law Board decided it necessary to appoint Government directors under Section 408 of the Companies Act. It was further submitted that when powers have been conferred upon the Government under Section 408 of the Companies Act, the Company Law Board is not concerned with the actions or the steps taken by the Reserve Bank of India under the provisions of the Reserve Bank of India Act. It was further pointed out that the action that has been taken by the Company Law Board was to protect the interest of the 25 million depositors and about 4000 employees employed in the petitioner-company. Mr. Sanjoy Kumar Bhattacharjee also relied upon the decision of the Delhi High Court in the case of Sakthi Trading Co. P. Ltd. v. Union of India [1985] 57 Comp Cas 789 and Mr. Bhattacharjee had adopted the said decisions in his argument in this behalf.
18. Mr. Bhattacharjee also contended that, when a decision was taken by the Company Law Board on the basis of some materials on record, it was not open to this court to go into the sufficiency of the materials if it shows that there were some materials on record to sustain the decision. It was further contended by Mr. Bhattacharjee that the procedural requirements were duly complied with and the principle of natural justice was duly followed by the Company Law Board and, as such, the decision of the Company Law Board under Section 408 of the said Act which was passed according to law was not open to challenge.
Findings :
19. The power under Section 408 of the Companies Act could be invoked by the Central Government only on being satisfied after such enquiry as it may think fit to prevent the affairs of the company from being conducted either in a manner which is prejudicial to the interest of the company or to public interest. In the instant case, the action proposed to be taken and as a matter of fact taken was allegedly in the interest of the company and the public at large. It is now a firmly-established principle that the existence of this condition precedent conferred jurisdiction to invoke power in such circumstances. In other words, unless the Company Law Board is satisfied that the affairs of the company are being conducted in a manner which is prejudicial to the interest of the company or to public interest, no such interference could be made by the Company Law Board under Section 408 of the Companies Act and that if it could be established by the respondents that, on the basis of the materials on record, the Company Law Board was satisfied that the affairs of the petitioner-company were conducted in a manner which is prejudicial to the interest of the company or to public interest, the same should be immune from any further judicial scrutiny and would not be open to challenge and in order to ascertain this aspect of the matter, it is necessary to examine the order passed by the Company Law Board on the basis of the show-cause notice in the context of the submissions made by the petitioner-company before the Company Law Board.
20. The Company Law Board had invoked the power under Section 408, inter alia, on the ground that "even though, under its new schemes, the company has prescribed a return of 10% compound interest on deposits, it collected substantial deposits against fresh certificates for a term of 10 years or more under its old schemes after the commencement of the RBI directions. Certificates under the old scheme carry an interest of 6% compound or simple interest of a little over 7%"
21. In this connection, it is the case of the petitioners that the Reserve Bank of India, after careful consideration of the matter in public interest, have granted liberty to the petitioner-company under Clause 18 of the statutory directions in respect of deposits received or to be received under or in respect of any certificates or instruments issued or sold before the commencement of the Directions ; in other words, the petitioner-company is entitled to collect money under the old scheme in terms of Clause 18 of the Directions issued by the Reserve Bank of India. If the Reserve Bank of India had expressly permitted the petitioner-company to do so, I do not find any reasons for the Company Law Board to take an exception in this regard and hold that the petitioner-company's said scheme in this behalf was prejudicial to the interest of the company or to public interest. Incidentally, it may be mentioned that the Reserve Bank of India issued statutory directions in public interest to regulate the said scheme to prevent exploitation of the subscribers pursuant to the instruction of the Government of India after the issue of the show cause notice by the Company Law Board. The question is that, when the Reserve Bank of India issued directions in public interest under which the petitioner-company was permitted to do something, can it be said by the Company Law Board that, acting in terms of the directions of the Reserve Bank of India, it would be contrary to public interest or acting in a manner prejudicial to the interest of the petitioner-company. The Reserve Bank of India being the only authority created by the law to regulate the business of financial institutions like that of the petitioner-company by issuing directions necessary for the purpose, had considered the matter and permitted that petitioner-company to act in a particular manner.
22. In the instant case, the Supreme Court of India, in the said judgment, had occasion to make such observations indicating some of the defects in the schemes undertaken by the petitioner-company and that the Supreme Court of India had given liberty to the respondent, Union of India, to take such steps as are open to them in law to regulate the scheme to prevent exploitation of ignorant subscribers and that, as a matter of fact, the Reserve Bank of India had intervened in the matter under the express provisions of the Reserve Bank of India Act by issuing statutory directions regulating the said schemes. Now, the question is, who is the authority in terms of the order of the Supreme Court of India who could take steps in that direction. The Company Law Board had invoked the provisions of Section 408 of the Companies Act which powers have been expressly conferred upon the Government to prevent oppression or mismanagement and that such power could be invoked only on the existence of certain conditions, namely, that the Central Government must be satisfied that it is necessary to appoint directors in order to prevent the affairs of the petitioner-company from being conducted in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interest of the company or to public interest. In this particular case, the Company Law Board had issued the show-cause notice and had invoked the provisions of Section 408 of the said Act on the strength of the observations made by the Supreme Court and it is not a case where the Company Law Board had independently intended to invoke the power under Section 408 of the Companies Act. When the parties have been alleging that such powers have been exercised in terms of the observation made by the Supreme Court of India, in that event, it has to be established that the steps as taken by the Company Law Board were to regulate the schemes as those run by the petitioner-company to prevent exploitation of ignorant subscribers. So, any steps that may be taken pursuant to the order of the Supreme Court must be to regulate the schemes so that ignorant subscribers may not be exploited. In my view, Section 408 of the Companies Act is not applicable for regulating the schemes as those run by the petitioner-company to prevent exploitation of ignorant subscribers. Anything done must be intended to prevent exploitation, of ignorant subscribers. In my view, the Reserve Bank of India, in the instant case, had intervened immediately after the issue of the show-cause notice by the Company Law Board and when the Reserve Bank of India is expressly authorised under the law to regulate such schemes by issuing directions, in that event, in terms of the order passed by the Supreme Court, the Reserve Bank of India is only competent in law to regulate the schemes as those run by the petitioner-company to prevent exploitation of ignorant subscribers and such steps have been taken by the Reserve Bank of India. It is for the Reserve Bank of India to take follow up action and to punish any person who is found to have violated any of the directions issued by the Reserve Bank of India, It is one thing to appoint directors on the board of directors and it is a quite different thing to take effective steps under the law for regulating the schemes, particularly financial schemes, as those run by the petitioner-company for preventing exploitation of ignorant subscribers. In my view, Section 408 of the Companies Act could not be invoked either for regulating the schemes or for doing anything to prevent exploitation of ignorant subscribers. When there is a special statute conferring power upon the Reserve Bank of India to issue directions in such matter in public interest, by necessary implication, the general power of the Company Law Board under Section 408 is excluded to that extent.
23. In this particular case, the show-cause notice was issued by the Company Law Board on March 13, 1987, and on March 31, 1987, the petitioner-company submitted a reply to the said show-cause notice. On May 15, 1987, the Reserve Bank of India issued directions in exercise of the powers conferred by Sections 45J and 45K of the Reserve Bank of India Act, 1932. There was no and could not be any allegation regarding the violation of the directions given by the Reserve Bank of India. It appears that the Company Law Board had travelled beyond the said show-cause notice in taking into consideration the alleged inability of the petitioner-company to comply fully with the directions of the Reserve Bank of India in this behalf. In the original show-cause notice, there were four principal grounds. The said grounds are as follows :
(a) "The yield will be very much lower than the 6% compound interst or 7% simple interest that we mentioned earlier. The subscriber is always at the losing end ....
(b) The company advertises its scheme widely in beguiling terms .....
(c) The field staff appears to be chosen for their social, political or official connections ....... The first subscription is literally shared between the company and its agents .....
(d) The majority of the subscribers commit default after the first year and only a few of the depositors continue their subscriptions and keep alive the certificates. This gives us an indication as to the class of depositors who are principally contacted and are perhaps intended to be so contacted. Having regard to the class of depositors and the. incentives offered to agents for securing fresh business, neglect and default of renewal subscriptions is an inevitable result. The agents are interested only in securing fresh business because of the high rate of commission in regard to fresh business and are loath to waste their time on collecting subsequent years' subscriptions fetching far less commission."
24. The submission of Mr. Somenath Chatterjee was that Clause 18 of the Directions of the Reserve Bank of India provides that the maximum rate of return in terms of Clause 5 or Clause 4 will not apply to deposits received or to be received under or in respect of any certificates, units or other instruments issued or sold before the commencement of the directions. Further, the petitioner-company also reduced the commission of the agents, only 15% of the first year's collection was transferred to profit and loss account and now commission is paid at 35% reducing from 75%. It appears that, on this point, the Company Law Board, in its order, held that the 30% of the first year's commission, if paid to the agents, would encourage the agents to continue to concentrate in collecting only first year's subscriptions and that it is held that it would not be possible for the petitioner-company to comply with the Directions of the Reserve Bank of India after giving reasons regarding investment in approved securities. In my view, there was no charge or allegation in the show-cause notice that it would not be possible for the petitioner-company to comply with the directions of the Reserve Bank of India regarding investment in approved securities. This is a clear case where the Company Law Board had travelled beyond the show-cause notice and it is a firmly-established principle that the decision taken on any grounds not disclosed in the show-cause notice is illegal and void as it violates the principle of natural justice in so far as the grounds are not disclosed in the show-cause notice.
25. Further, in this context, the Company Law Board has also held that the subsequent year's subscriptions would diminish on account of lack of interest by commission agents and, consequently, the company would become unsuccessful causing substantial damage to the public interest. With regard to these allegations, the petitioner-company's case is that, after the issue of the show-cause notice by the Company Law Board, the Reserve Bank of India had issued Directions regulating the financial schemes which were undertaken by the petitioner-company and that when the petitioner-company was fully carrying out the scheme in accordance with the directions issued by the Reserve Bank of India, the Company Law Board cannot take the view that anything done pursuant to the Directions or in compliance with the Directions issued by the Reserve Bank of India would not be in public interest. The petitioner-company had effectively met the charges made by the Company Law Board in this behalf. In the instant case, there were charges on four counts and the petitioner-company has submitted a reply to those charges and also pointed out that, after the issue of the charge sheet, the Reserve Bank of India had intervened and the petitioner-company was carrying out the said scheme on the basis of the directives of the Reserve Bank of India and, as a matter of fact, even before Parliament, it was admitted by the Minister-in-Charge of the department that the petitioner-company was carrying out the said scheme strictly in accordance with the provisions of the directives issued by the Reserve Bank of India.
26. The next question in this particular case is whether the Company Law Board was satisfied as required under Section 408 of the Companies Act that the affairs of the petitioner-company are being conducted in a manner prejudicial to the interest of the company or in public interest. In this context, Mr. Sanjoy Bhattacharjee, learned advocate appearing on behalf of the respondents, contended that, when the authorities concerned had taken a decision, it is not open to this court to go into the sufficiency of the materials on the basis of which the decision was taken by the Company Law Board in this behalf.
27. In the affidavit-in-opposition filed on behalf of respondent No. 1 and affirmed by Sri Kanchan Kumar Dhar, on March 18, 1988, it was stated that "I say that the opinion of the Central Government as to the necessity of initiating the proceeding under Section 408 of the said Act was framed on an objective consideration of the facts and circumstances of the instant case and all of them severally or jointly constituted relevant and sufficient materials to initiate the proceeding. Moreover, it is respectfully submitted that the existence of material towards the formation of opinion of the Central Government is necessary and not the adequacy and sufficiency thereof. The existence of the condition precedent is open to scrutiny by court no doubt but not the sufficiency and adequacy thereof. Further, it was stated therein that "I say the order under Section 408 of the said Act is well within the jurisdiction of the Company Law Board and has been passed after satisfying the principles of natural justice and to safeguard the interests of the company and public interest." The powers under Section 408 of the said Act can be exercised only on being satisfied by the appropriate authority that the affairs of the company were being conducted in a manner prejudicial to the interest of the company and/or to public interest on the basis of sufficient evidence on record. Such a power could not be exercised by the Central Government ' as stated in the affidavit-in-opposition merely on the basis of formation of opinion that the affairs of the company were being conducted in a manner prejudicial to the interest of the company or the public interest. There appears to be some misconception about the scope and ambit of the provision of Section 408 of the said Act in the mind of the authorities concerned. The legal principles applicable in case of formation of opinion were wholly inapplicable and inadmissible in this case. The meaning of the word 'satisfy' could not be equated with the word "opinion". The dictionary meaning of the word 'satisfy' means "to put an end to doubt or uncertainty, to persuade by arguments or evidence, convince ....". In my view, the word "satisfy", in the context in which it was used, means that there must be sufficient evidence and the standard of proof that is required is the proof which ordinarily satisfies any unprejudiced mind beyond reasonable doubt, objectively and not subjectively.
28. In this case, when an authority is required to be satisfied regarding the existence of a certain state of affairs, then it must be held that there must be some evidence on the basis of which the authorities concerned had to make a positive finding on the basis of evidence on record that the authorities concerned were satisfied that something was done in a manner which was prejudicial to the interest of the company or to public interest. In the case of Ganga Bishnu Swaika v. Calcutta Pinjrapole Society, , the Supreme Court considered the effect of the existence of the word "satisfy" in Section 6 of the Land Acquisition Act. Under Section 6 of the Land Acquisition Act, it is provided that, when the Government is satisfied after considering the report, if any, made under Section 5A of the said Act that any particular land is needed for a public purpose, a declaration shall be made to that effect. In this context, the Supreme Court observed at page 619 that :
"Apart from the clear language of Section 6, it seems that it is immaterial whether such satisfaction is stated or not in the notification. For, even if it is so stated, a person interested in the land can always challenge as a matter of fact that the Government would have to satisfy the court by leading evidence that it was satisfied as required by Section 6".
29. Applying this test laid down by the Supreme Court, let me examine whether the Company Law Board was satisfied or could be satisfied on the basis of the materials on record "that the affairs of the company are being carried on in a manner prejudicial to the interest of the company or to public interest". The Company Law Board, in order to, be satisfied in this behalf, held that the petitioner-company had acted contrary to the Directions of the Reserve Bank of India in respect of the certificates under the old schemes, and in this context, it was held that as the company was spending 47.37% of the first year's subscription/collection on commission, bonus, field allowance, etc., it was established that it will not be possible for the company to comply with the Directions of the Reserve Bank of India with regard to the investment in approved securities, that subsequent years' subscriptions would diminish on account of lack of interest by commission agents and consequently, the schemes of the company would become unsuccessful causing substantial damage to public interest. In this connection, in accordance with the provisions of Section 408 of the Companies Act, the Company Law Board is to be satis fied that the affairs of the company are being conducted in a manner "prejudicial to the interest of the company or to public interest". Here, I find that the expression is in the present tense and not in the future or past tense. Even assuming that the finding, in this behalf, of the Company Law Board is correct, in that event, it was commenting on-something which may happen in the future and in the future it may be hald that the company would be acting in a manner prejudicial to public interest. The Legislature, in the particular case, significantly used the present tense and not the past or future tense. In this connection, reference may be made to the decision of the Privy Council in the case of Maradana Mosque v. Badi-ud-Din Mahmud [1966] 1 All ER 545, wherein the Privy Council considered a provision wherein, before a Minister had jurisdiction to take action, he was required to be satisfied that "any school ... is being so administered in contravention of any of the provisions of this Act". It was held that, because of the present tense, the Minister should concern himself with the present conduct of the school and not the past when making the order.
30. It is one thing to say that the affairs of the company are being conducted in a manner prejudicial to the interest of the company or to public interest and it is quite another thing to say that it would not be possible for the petitioner-company to comply with the directions of the Reserve Bank of India in the future regarding investment in approved securities that subsequent years' subscriptions might diminish on account of lack of interest by commission agents and consequently, the scheme of the company might prove unsuccessful. Here, this observation made by the Company Law Board is made on some speculation as to what could happen in future, which is not a matter that could be considered under Section 408 of the Companies Act and, secondly, whether subsequent years' subscriptions would diminish on account of lack of interest by commission agents is a matter of pure speculation and further, this aspect of the matter was considered by the Reserve Bank of India in its directives and that the provisions for commission, bonus and the first year's subscription have been changed. It is also clear to me that the Company Law Board, in order to arrive at the conclusion that the affairs of the company were being conducted in a manner prejudicial to the interest of the company or to public interest, took into consideration irrelevant and extraneous matters and made some findings which were perverse. It is contrary to the record that the petitioner-company had expressed its inability to comply fully with the directions of the Reserve Bank of India without modification. The fact is just the opposite. The petitioner prayed for exemption from the operation of the directions which were issued by the Reserve Bank of India and when the same was rejected, the petitioner-company informed the Reserve Bank of India in writing that they could comply with the directions of the Reserve Bank of India by modifying the scheme of the company and this fact has been mis-interpreted and mis-understood by the Company Law Board to mean that the petitioner-company was unable to comply with the directions of the Reserve Bank of India without modification of the directions of the Reserve Bank of India and that it appears that the Company Law Board had laid much stress on this fact which, on the face of it, was erroneous. It further appears to me that the order under Section 408 was passed also on the ground of the petitioner-company specifically mentioned in the show-cause notice. It is one of the cardinal principles that when action was taken on the basis of certain allegations, the final order passed thereto could not travel beyond the grounds mentioned in the show-cause notice as was done in this case. In this particular case, with regard to the charge mentioned in Clause (e) to the show-cause notice, it is clear and un-disputable that, at the time the company was to get return at 10% compound interest on their deposits which was the rate of interest prescribed in Clause 5 of the Directions of the Reserve Bank of India and as such no action could be taken on the basis of ground (a). With regard to ground (b), namely, advertisement, it is an admitted position that the norms regarding advertisement have been laid down in para 16 of the Directions of the Reserve Bank of India and the company had not departed from the said norms and as such the proposed action could not be taken against the petitioner-company on ground (b). With regard to ground (c), it is an admitted position that the field staff which were chosen for their political and social connection have been removed and had ceased to be the commission agents of the company and as such no action was warranted on that ground. With regard to ground (d), namely, lapse of deposits made by the defaulted subscribers, it is undisputed that the forfeiture Clause which had been highlighted by the Supreme Court of India had been deleted from all schemes of the petitioner-company altogether with effect from November 3, 1986, and the same was also noticed by the Supreme Court in its judgment. In that view of the matter, no action could be taken on the basis of ground (d). One thing is clear that, in terms of the order of the Supreme Court of India, nothing was considered by the Company Law Board which was aimed at protecting the innocent subscribers from exploitation in the hands of the petitioner-company under the said Scheme.
31. In this particular case, the court has been called upon to decide the power of the Government under Section 408 of the Companies Act to prevent oppression or mismanagement by the board of directors of the company and when it is a condition precedent that, before any action was taken, the authorities concerned had to be satisfied that the affairs of the company were being conducted in a manner prejudicial to the interest of the company or to the public interest, the court has to interpret this provision strictly, inasmuch as the power could be exercised only on the existence of the conditions mentioned in the section. This provision cannot be interpreted or could not lightly be exercised, inasmuch as it affects the rights of the board of directors in running the affairs of the company under the ordinary law and only in a case where it is established beyond all reasonable doubt that the affairs of the company were being carried on in a manner prejudicial to the interest of the company or to public interest, could action be taken under Section 408 of the said Act. Section 408 of the said Act provided a remedy against oppression of members by acting prejudicially affecting the interest of the company or the interest of the public under certain specified conditions and, considering the mischief aimed at, it does not appear to me that the court has power to construe the words in a wider sense than they appear particularly when it is intended to interfere with the rights of citizens. Such an action could not be allowed to be taken on the basis of mere speculative findings and on the basis of materials and grounds not disclosed in the show-cause notice and in this particular case, the petitioner-company had challenged that as required under Section 408 of the Companies Act, the Company Law Board could not be satisfied. On the basis of the materials disclosed in the order, I am unable to hold that the Company Law Board could be said to have been satisfied that the affairs of the company were being carried on in a manner prejudicial to the interest of the company or to public interest. The affidavit-in-opposition also did not disclose any materials on the basis of which it could be held that the Company Law Board was satisfied as required under the law. In the instant case, the Supreme Court made some observations ; and on the basis of the observations, the Supreme Court granted liberty to the Union of India to take action to regulate the schemes in accordance with law to protect the innocent subscribers from exploitation and when the Reserve Bank of India which was competent and which was authorised in this behalf under the law to take action, had intervened in public interest and issued directions for regulating the schemes and when the petitioner-company was found to have been carrying on the said schemes strictly according to the directions of the Reserve Bank of India, it cannot be said by any stretch of imagination that the affairs of the petitioner-company were being conducted in a manner prejudicial to the interest of the company or to public interest. It was the duty of the Reserve Bank of India to protect the interest of a large number of depositors. As a matter of fact, the Reserve Bank of India had intervened in this matter and after intervention made by the Reserve Bank of India, immediately after the issue of the show-cause notice, the petitioner-company was found to have been carrying on the said schemes strictly in accordance with the directions given by the Reserve Bank of India. The Reserve Bank of India, under the law, has power to supervise and control such schemes under the various provisions of the Reserve Bank of India Act for protecting the innocent subscribers from exploitation or otherwise which the Company Law Board had not been conferred with under Section 408 of the said Act. The Company Law Board, under Section 408 of the said Act, cannot take any action by reviewing the directions of the Reserve Bank of India or by bypassing the same. The decision of the Delhi High Court relied upon by the respondents is of no help in the facts and circumstances of this case.
32. Accordingly, I hold that there was nothing on record to show the affairs of the petitioner-company were being carried on in a manner prejudicial to the interest of the company and/or to public interest and as such the condition precedent for invoking the provisions of Section 408 of the Companies Act was wholly absent in the instant case and I further hold that the Company Law Board had no jurisdiction under Section 408 of the Companies Act to regulate the said scheme of the petitioner in view of the directions issued by the Reserve Bank of India under the provisions of the Reserve Bank of India Act and as such the impugned order dated November 13, 1987, passed by the Company Law Board under Section 408 of the Companies Act was illegal and void. In the result, the writ application succeeds. Rule is made absolute. A writ in the nature of certiorari do issue directing the respondents show-cause notice dated March 13, 1987, and the impugned order dated November 13, 1987, and the writ in the nature of mandamus do issue to cancel, withdraw and rescind the show-cause notice dated March 13, 1987, and the impugned order dated November 13, 1987. There will be no order as to costs. No order is passed on the application for vacating the interim order.