1973 (2) TMI 86 - HC - Companies Law

Issues Involved:

1. Constitutionality of Section 294(5) of the Companies Act, 1956, under Article 14 of the Constitution.
2. Nature of the order passed by the Company Law Board: Administrative or quasi-judicial.
3. Requirement for the order to be a speaking order with reasons.
4. Observance of principles of natural justice in the proceedings.
5. Scope of the Company Law Board's power under Section 294(5) to vary the terms of appointment of the sole selling agent.

Detailed Analysis:

1. Constitutionality of Section 294(5) under Article 14:

The appellant-company argued that Section 294(5) of the Companies Act, 1956, is discriminatory and violates Article 14 of the Constitution. They contended that the section vests arbitrary and uncanalised powers in the Central Government to vary the terms of a contract approved by the shareholders, without any guidelines or norms. The court, however, found that the provisions of Section 294(5) are not violative of Article 14. It held that the section aims to prevent contracts that are prejudicial to the interests of the company, particularly in situations where the market conditions make the appointment of a sole selling agent unnecessary or overly generous. The classification of companies with sole selling agents whose terms are prejudicial to the company's interests was deemed rational and justified.

2. Nature of the Order: Administrative or Quasi-Judicial:

The court examined whether the order passed by the Company Law Board under Section 294(5) is administrative or quasi-judicial. It concluded that the power exercised by the Company Law Board is administrative. The court noted that the process involves collecting information, forming an opinion based on that information, and making necessary variations to the terms of the sole selling agent's appointment. The nature of the power, the framework of the law, and the consequences of the exercise of that power led the court to determine that the function is administrative, not quasi-judicial.

3. Requirement for a Speaking Order:

The appellant-company argued that if the order is quasi-judicial, it must be a speaking order with reasons. The court, however, found that since the order is administrative, there is no requirement for it to be a speaking order. The court referenced various judgments, including Travancore Rayons Ltd. v. Union of India, which emphasized the necessity of reasons in quasi-judicial orders for the purpose of appeals and revisions. However, this requirement does not extend to administrative orders.

4. Observance of Principles of Natural Justice:

The appellant-company contended that the principles of natural justice were not observed, as they were not given access to all relevant material and were not properly heard. The court found that although the Company Law Board did not directly communicate with the appellant-company, the appellant had access to the material through the respondent No. 5-company and was given a personal hearing. However, the court noted that some important documents were not made available to the appellant and that the Company Law Board's attitude suggested that they did not consider the appellant to have a locus standi. The court concluded that there was a failure to observe the principles of natural justice, as the appellant was not fully informed of the material against them and was not given an adequate opportunity to respond.

5. Scope of the Company Law Board's Power:

The appellant-company argued that the Company Law Board acted beyond its powers by reducing the sole selling agent to the position of an ordinary agent. The court agreed, stating that the term "vary" includes "abrogate," but the power to vary terms and conditions does not extend to fundamentally altering the nature of the sole selling agent's appointment. The court held that the Company Law Board's order, particularly the new clause (12), which allowed the manufacturer to sell directly without reference to the sole distributor, effectively changed the character of the agency and was beyond the scope of Section 294(5).

Conclusion:

The court allowed the appeal, quashing the impugned order dated April 20, 1965, as amended on May 13, 1965. The appellant-company was awarded costs throughout from respondents Nos. 1 to 4, with no order as to costs in respect of respondent No. 5-company. The court emphasized the need for proper observance of natural justice and the limitations on the Company Law Board's power under Section 294(5) of the Companies Act, 1956.

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