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TMI Blog1966 (5) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... r was made by the Chairman of the Board, Mr. R.C. Dutt, on behalf of the Board by virtue of the powers conferred on him by certain rules to which we shall refer later. On June 4, 1965, the company preferred a writ petition under article 226 of the Constitution in the Punjab High Court for the issue of a writ of mandamus or other appropriate writ, direction or order quashing the order of the Board dated May 19, 1965. The managing director, Mr. Balasubramanian, joined in the petition as petitioner No. 2. The writ petition is directed against 7 respondents, the first of which is the Company Law Board. The second respondent is Mr. T.T. Krishnamachari, who was at that time Minister for Finance in the Government of India. The inspectors appointed are respondents Nos. 3 to 6 and Mr. Dang is the 7th respondent. Apart from the relief of quashing the order of May 19, 1965, the appellants sought the issue of a writ restraining the Company. Law Board and the inspectors from giving effect to the order dated May 19, 1965, and also sought some other incidental reliefs. The order of the Board was challenged on 5 grounds, which are briefly as follows : (1)that the order was made mala fide ; (2)th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that if the plant was not completely installed and got into running order by June 1, 1965, the company will have to make alternative arrangements and that it would hold M/s. L.A. Mitchell Ltd. liable to pay damages to the company for the loss suffered by it. As a result of the notice, Lord Poole visited India in April/May, 1965. In his. opinion, the design of the plant was defective. Certain negotiations took place between the company and Lord Poole in the course of which an undertaking was given by Lord Poole on behalf of the collaborators that the work would be completed with necessary alterations and modifications in accordance with the report of M/s. Humphrey & Co., and that the collaborators would spend an additional amount up to GBP 250,000 as may be required for the purpose. It is said that the plant was producing at that time only 25% of its installed capacity but that according to the assurance given by Lord Poole it would yield full production by April, 1966. According to the appellants, before entering into a collaboration agreement with M/s. L.A. Mitchell Ltd., the appellant No. 2, Balasubramanian, was negotiating with a German firm named Kali Chemie A.G. of Ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .T. Krishnamachari to the proposed action. Therefore, according to him, the real order is of Mr. Krishnamachari, even though the order is expressed in the name of the Board. We find no substance in the argument. The decision to take action was already taken by the Chairman and there is nothing to indicate that in arriving at that decision he was influenced by the Finance Minister. If the decision arrived at by the Chairman was an independent one, it cannot be said to have been rendered mala fide because it was later approved by Mr. Krishnamachari whose sons undoubtedly constitute the partnership firm of M/s. T.T. Krishnamachari & Sons. It is also suggested by Mr. Setalvad that the action approved of in December, 1964, was delayed till May, 1965, because in the interval some negotiations with Kali Chemie had been started and, had they ended fruitfully, M/s. T.T. Krishnamachari & Sons would have secured the sole monopoly for sale of the products of barium chemicals. Now it does seem from certain material brought to our notice that negotiations with Kali Chemie were revived by appellant No. 2 because of the difficulties which were being experienced in the working of the collaboration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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." In view of the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the board that the stage for exercising the discretion conferred by the. provision is reached. The discretion conferred to order an investigation is administrative and not judicial since its exercise one way or the other does not affect the rights of a company nor does it lead to any serious consequences as, for instance, hampering the business of the company. As has been pointed out by this court in Raja Narayan Bansilal v. Maneck Phiroz Mistry [1960] 30 Comp. Cas. 644 ; [1961] 1 SCR 417, the investigation undertaken under this provision is for ascertaining facts and is thus merely exploratory. The scope for judicial review of the action of the board must, therefore, be strictly limited. Now, if it can be shown that the board had in fact not formed an opinion its order could be successfully challenged. This is what was said by the Federal Court in Emperor v. Sibnath Banerjee [1944] FCR 1, on appeal [1945] FCR 195 (PC), and approved later by the Privy Council. Quite obviously there is a difference between not forming an opinion at all and forming an opinion upon grounds, which, if a court could go into that question at all, could be regarded as inapt or insufficient or irrelevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as passed after careful and independent examination of the material by the chairman and that it was issued in proper exercise of the powers conferred upon it. He has specifically denied that it was issued at the instance of the second respondent. In paragraph 10 Mr. Dutt has taken the plea that the petition was liable to be dismissed as it had not been made bona fide but for extraneous reasons and to create prejudice with a view to thwart statutory investigation. Then he has set out the circumstances upon which his contention is based. In paragraph 13 he has stated that without prejudice to his submissions in the earlier paragraphs he would reply to allegations contained in the various paragraphs of the writ petition. Then follows paragraph 14 upon which Mr. Setalvad has founded an argument that the grounds disclosed therein being extraneous, the order is invalid. In this paragraph Mr. Dutt has admitted some of the facts stated in paragraphs 1 to 19. He has also said that the Board was aware of the fact that the company had entered into collaboration with M/s. L.A. Mitchell Ltd. He has then added : " . . . but it has no information of any of the other matters and/or negotiations wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Board to form the said opinion. In this state of pleadings it would not be right to construe the affidavit of Mr. Dutt to mean that the only conclusions emerging from the material before the Board are those that are set out in paragraph 14 of his affidavit. Apart from this, we do not think that the conclusions set out in paragraph 14 are extraneous to the matters indicated in the order of May 19, 1965. What is said therein is that there are circumstances suggesting that the business of the appellants is being conducted with intent to defraud its creditors, members and others, and that the persons concerned with the management of the affairs of the company have been guilty of fraud, misfeasance and other misconduct towards the company and its members. It has to be borne in mind that what the Board is to be satisfied about is whether the circumstances suggest any of these things and not whether they establish any of these things. Now, the first of its conclusions is to the effect that the materials show that there was delay, bungling, faulty planning of the project and that this resulted in double expenditure for which the collaborators had put the responsibility upon the mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion possible is that it was due to lack of capability. It is reasonably conceivable that the result had been produced by fraud and other varieties of dishonesty or misfeasance. The order does not amount to a finding of fraud. It is to find out what kind of wrong action has led to the company's ill-fate that the powers under the section are given. The enquiry may reveal that there was no fraud or other similar kind of malfeasance. It would be destroying the beneficial and effective use of the powers given by the section to say that the Board must first show that a fraud can clearly be said to have been committed. It is enough that the facts show that it can be reasonably thought that the company's unfortunate position might have been caused by fraud and other species of dishonest action. In our opinion, therefore, the argument of Mr. Setalvad about the circumstances being extraneous cannot be accepted. Coming to the third point, Mr. Setalvad pointed out that four ex-directors of the company who had resigned submitted a memorandum to Mr. T.T. Krishnamachari while he was holding the office of Finance Minister in which grave allegations were made concerning the affairs of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the department had been receiving various complaints in regard to the conduct of the affairs of the company. One complaint had also been received by the Special Police Establishment and forwarded by it to the department in November, 1963. The matter was enquired into by the Regional Director of the Board at Madras and he, in his report sent to the Board in September, 1964, suggested an urgent and comprehensive investigation into the affairs of the company. In his affidavit the Chairman of the Board, Mr. Dutt, has stated further in paragraph 5(b) as follows : "The material on the file was further examined in the light of the Regional Director's recommendation by the two Under Secretaries of the Board (Sarvashri M.K. Banerjee, C.S.S. and K.C. Chand, I.R.S.) at the headquarters of the Board in New Delhi and both of them endorsed the recommendation of the Regional Director to order an investigation. The matter was then considered by the Secretary of the Company Law Board 'in charge of investigation (Shri D.S. Dang, I.A.S.) and he also expressed his agreement that there was need for a deeper probe into the affairs of the company." Then again in paragraph 5(c) ho has stated as follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Company Law Board. By notification dated February 1, 1964, the Central Government has delegated, amongst other powers and functions, those conferred upon it by section 237 upon the Company Law Board. By another notification of the same date, the Central Government has made and published rules made by it in exercise of its powers under section 642(1) read with section 10E(5), rule 3 of which reads thus : "Distribution of business.-The Chairman may, with the previous approval of the Central Government, by order in writing, distribute the business of the Board among himself and the other member or members, and specify the cases or classes of cases which shall be considered jointly by the Board." By order dated February 6, 1964, the Chairman of the Company Law Board specified the cases and classes of cases to be considered jointly by the Board and distributed the remaining business between himself and other members of the Board. Amongst the matters allocated to the Chairman is the appointment of an inspector under section 237 to investigate the affairs of a company. This, Mr. Setalvad says, could not be done in the absence of an express provision in the Act. In this connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pursuance of a rule enacted by the Central Government under section 642(1) read with section 10E(5), that the exercise of the power does not violate any fundamental right of the company, that the opinion to be formed under section 237(b) is subjective and that if the grounds are disclosed by the Board the court can examine them for considering whether they are relevant. In the case before us they appear to be relevant in the context of the matter mentioned in sub-clauses (i) to ( iii) of section 237(b). Though the order could be successfully challenged if it were made mala fide, it has not been shown to have been so made. The attack on the order thus fails and the appeal is dismissed with costs. Hidayatullah, J. - We are concerned in this appeal with the legality of an order of the Chairman, Company Law Board, May 19, 1965, (purporting to be under section 237(b) of the Companies Act, 1956), declaring that the affairs of the Barium Chemicals Ltd. be investigated. As a consequence inspectors have been appointed and searches have been made. The company and its managing director filed a petition under article 226 of the Constitution in the High Court of Punjab seeking to quash the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Registrar, who may, after being authorised by a Presidency Magistrate or a Magistrate, First Class, enter anyplace, search and seize any document relating to the company, its managing agents, or secretaries and treasurers or managing director or manager, if he has reason to believe that it may be destroyed or tampered with. Sections 235 to 251 provide for investigation of the affairs of a company and for sundry matters related to such investigations. They follow the scheme of sections 164 to 175 of the English Act of 1948. Section 235 enables the Central Government to appoint inspectors for investigation and report generally if the Registrar reports under section 234 and also if a stated number of shareholders or shareholders possessing a stated voting power apply. When members apply they must support their application by evidence and give security for costs of investigations. In the present case no action under any of the sections noted so far was taken but it was taken under section 237. This section is in two parts. The first part which is (a) compels the Central Government to appoint inspectors to investigate and report if the company by a special resolution or the court by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment to be the Chairman of the Company Law Board. (4) No act done by the Company Law Board shall be called in question on the ground only of any defect in the constitution of, or the existence of any vacancy in, the Company (5) The procedure of the Company Law Board shall be such as may be prescribed. (6) In the exercise of its powers and discharge of its functions, the Company Law Board shall be subject to the control of the Central Government." The Board was constituted on February 1, 1964, by a notification and by a notification of even date in exercise of the powers conferred by clause (a) of sub-section (1) of section 637 read with sub-section (1) of section 10E of the Companies Act, the Central Government delegated its powers and functions to the Board under section 237(b), among others. Simultaneously, acting in exercise of the powers conferred by sub-section (I) of section 642 read with sub-section (5) of section 10E, the Central Government made the Company Law Board (Procedure) Rules, 1964, and one such rule dealt with distribution of business to the following effect : "3. Distribution of business. - The Chairman may, with the previous approval of the Central Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly allowed to be made to the Board only. The statute, as it was formerly, gave no authority to delegate it differently or to another person or persons. When it spoke of procedure in sub-section (5), it spoke of the procedure of the Board as constituted. The lacuna in the Act must have been felt, otherwise, there was no need to enact sub-section (4A). The argument of the learned Attorney-General that sub section (4A) was not needed at all, does not appeal to me. It is quite clear that its absence would give rise to the argument accepted by me, which argument is unanswerable in the absence of a provision such as the new sub-section. My brother Shelat has dealt with this aspect of the case fully and I cannot add anything useful to what he has said. I agree with him entirely on this point. I shall now consider the question of mala fides. This arises in two different ways. There is first mala fides attributed to the Chairman because he is said to have acted under the behest of a Minister of Cabinet interested in another rival company. It is not necessary to go into it. The Chairman obtained the opinion of quite a few of his assistants (perhaps more than was altogether necessary) and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as done either contrary to the provisions empowering him or beyond those provisions. In dealing with this problem the first point to notice is that the power is discretionary and its exercise depends upon the honest formation of an opinion that an investigation is necessary. The words "in the opinion of the Central Government" indicate that the opinion must be formed by the Central Government and it is of course implicit that the opinion must be an honest opinion. The next requirement is that "there are circumstances suggesting, etc." These words indicate that before the Central Government forms its opinion it must have before it circumstances suggesting certain inferences. These inferences are of many kinds and it will be useful to make a mention of them here in a tabular form : (a)that the business is being conducted with intent to defraud- (i)creditors of the company or (ii)members, or (iii)any other person ; (b)that the business is being conducted (i)for a fraudulent purpose, or (ii)for an unlawful purpose ; (c)that persons who formed the company or manage its affairs have been guilty of- (i)fraud, or (ii)misfeasance or other misconduct- towards the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Now the Chairman in his affidavit referred to two memoranda dated May 30, 1964, and July 4, 1964, presented by certain ex-directors and also stated that from September, 1961, complaints were being received in regard to the conduct of the affairs of the company, and one such complaint was received from the Special Police Establishment in November, 1963. The nature of the complaints was not disclosed but in reference to the memoranda it was stated that "irregularities" and "illegalities" in the conduct of the affairs of the company were alleged therein. It was also stated that the memoranda "were supported by documentary evidence and details of the impugned transactions and the signatories offered to produce witnesses with knowledge of these transactions". This was followed by an enquiry by the Regional Director of the Board a Madras (Shri R.S. Ramamurthi, I.A.S.) who made a report in September, 1964. The report was next considered by two Under-Secretaries and by the Secretary of the Company Law Board who all agreed "that there was need for a deeper probe into the affairs of the company". The matter was then placed before the Chairman who formed the opinion that there were circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the affairs of the company had in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company and its members." The question thus arises what has the Chairman placed, before the court to indicate that his action was within the four corners of his own powers ? Here it must be noticed that members are ordinarily expected to take recourse to the Registrar because there they have to be in a certain number or command a certain proportion of the voting power. They are also required to give evidence and the company gets an opportunity to explain its actions. If section 237(b) is used by members, as an alternative to section 236, the evidence must unerringly point to the grounds on which alone action can be founded. In my opinion there is nothing to show that the reports which were being received from September, 1961, or the report of the Special Police Establishment indicated fraud, illegality or action or actions with intent to defraud, as contemplated by the section. The affidavit merely says that these reports indicated the need for a deeper probe. This is not sufficient. The material must suggest certain inferences and not the need for "a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he had seen the papers and agreed with his two Under-Secretaries and the Regional Director that a "deeper probe" was necessary. There is no hint even in this affidavit that the circumstances were such as to suggest fraud, intent to defraud or misconduct, that is to say, circumstances under which investigation can be ordered. The other affidavits also run the same way and it is not, therefore, necessary to refer to them. We are concerned really with the affidavits of the Chairman and Mr. Dang in relation to the exercise of the power conferred by section 237(b). Neither proves the existence of circumstances under which the power could be exercised. In my opinion, therefore, the action has not been proved to be justified, No doubt, the section confers a discretion but it sets its own limits upon the discretion by stating clearly what must be looked for in the shape of evidence before the drastic act of investigation into the affairs of a company can be taken. The affidavits which were filed in answer to the petition do not |3isclose even the prima facie existence of these circumstances. On the other hand, they emphasise only that there was mismanagement and losses which necessitated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board should exercise his individual judgment on the matter and all the members of the Board should act together and arrive fat a joint decision. Prima facie, the Board must act as a whole and cannot delegate its function to one of its members. The learned Attorney-General submitted that a distribution of business among the members of the Company Law Board is not a delegation of its authority, and the maxim has no application in such a case. I cannot accept this submission. In Cook v. Ward [1877] LR 2 CPD 255, the court held that where a drainage board constituted by an Act of Parliament was authorised by it to delegate its powers to a committee, the powers so delegated to the committee must be exercised by them acting in concert and it was not competent to them to apportion those powers amongst themselves and one of them acting alone, pursuant to such apportionment, could not justify his acts under the statute. Lord Coleridge C.J. said at page 262 : "It was not competent to them to delegate powers, which required the united action of the three, to be exercised according to the unaided judgment of one of "them." Again, in Vine v. National Dock Labour Board[1957] AC 488, the House ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Government the additional power of framing rules regulating the procedure of the Board and generally to carry out the purposes of section 10E, Parliament must have intended I that the internal organisation of the Board and the mode and manner of j transacting its business should be regulated entirely by rules framed by the Government. The Government had, therefore, power to frame the Company Law Board (Procedure) Rules, 1964, authorising the Chairman to distribute the business of the Board. In the exercise of the power conferred by this rule, the Chairman assigned the business under section 237 to himself. The Chairman alone could, therefore, pass the impugned order. Act No. 31 of 1965 has now inserted sub-section (4A) in section 10E authorising the Board to delegate its powers and functions to its Chairman or other members or principal officer. The power under sub-section (4A) may be exercised by the Board independently of any rules framed by the Central Government. We find; however, that the Central Government had under sections 10E(5) and 642(1) ample power to frame rules authorising the Chairman to distribute the business of the Board. The wide ambit of this rule-making powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd to the relevant facts, he could not have formed this opinion. I am therefore inclined to think that he formed the opinion without applying his mind to the facts. An opinion so formed by him is in excess of his powers and cannot support an order under section 237(b). The appeal is allowed and the impugned order is set aside. concur in the order which Shelat J. proposes to pass. Shelat J. - The appellant-company is a public limited company registered on July 28, 1961, having its registered office at Ramavaram in Andhra Pradesh and the second appellant was at all material times and is still its managing director. On August 25, 1959, and April 23, 1950, appellant No. 2 obtained two licences for the manufacture of 2,500 and 1,900 tonnes of barium chemicals per year in the name of transword Traders of which he-was the proprietor. He then started negotiations with Kali Chemie of Hanover, West Germany, to collaborate with him in setting up a plant. While he was so negotiating, Messrs. T.T. Krishnamachari & Co., who were the sole selling agents of the said German company, approached the second appellant for the sole selling agency of barium products of the plant proposed to be put up b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the plant during that month from Messrs. Humphreys and Glascow (Overseas) Ltd., Bombay. In September, 1964, a meeting was arranged in London between the company's representatives and the representatives of L.A. Mitchell Ltd. of which Lord Poole was the chairman. It was agreed that L.A. Mitchell Ltd. should depute Messrs. Humphreys and Glascow Ltd., London, to go through the designs, etc., and to make a report showing the causes of the repeated failures of the plant and suggesting remedies therefor. Lord Poole also agreed that the factory would be commissioned without any further delay and that L. A. Mitchell Ltd. would carry out the necessary repairs at their cost. While these negotiations were going on, representatives of Messrs. Kali Chemie of Hanover arrived in India to negotiate a collaboration agreement with the company. On April 4, 1965, a meeting of the company's directors was held in New Delhi which was attended by one Kriegstein, a representative of Kali Chemie, and also by the general-manager of Messrs. T.T.K. & Co. Certain proposals were discussed and it was decided that the company should give notice to L.A. Mitchell Ltd. cancelling the agreement with them. Accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company since its incorporation in1961. . ." On May 25, 1965, search warrants were obtained by respondents Nos. 3 to 10 and accordingly search was carried out at the office of the company at Ramavaram and at the residence of the second appellant and several documents and files were seized. On May 28, 1965, the second appellant submitted a representation to the Chairman of the first respondent Board. He explained that out of the company's paid up capital of Rs. 50 lakhs, shares of the value of about Rs. 47 lakhs were owned by members of the public, that the company was the first of its kind in India, that it could not go into production soon because of the defective planning by the collaborators, that as a result of recent negotiations, the collaborators had agreed to invest GBP250,000 more and that the company's factory had now commenced production from April, 1964, that the Board appeared to have acted on the complaints filed by the said four directors who resented the second appellant's refusal to purchase their holdings at a price above par demanded by them ; that though those complaints were lodged some two years ago and were not acted upon, they were sought now to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. T.T.K. & Co., and that firm was interested in the production of barium chemicals or for being appointed as sole selling agents or otherwise, the first respondent, its chairman and officials were not shown to have been, aware of the second respondent's interest in M/s. T.T.K. & Co. and therefore in the absence of any allegation of persona] malice against them the allegation as to mala fides failed. The High Court also rejected the contention that section 237(b) was ultra vires articles 14 and 19(1)(g) or that the procedure laid down under power conferred by the Rules or the Rules themselves were invalid. On behalf of the appellants the following four contentions were raised 1 (1) that the impugned order dated May 19, 1965, was mala fide, that the High Court erred in failing to give due weight to the personal hostility of the second respondent against the appellants and deciding the petition on the footing that the first respondent was an independent authority and that it was its Chairman who on his own had formed the requisite opinion and passed the order and therefore the motive or the evil eye of the second respondent was irrelevant. The High Court also erred in failing to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (1) together with such information or explanation to be furnished as aforesaid discloses an unsatisfactory state of affairs, he has to report the case to the Central Government. Sub-section (7) provides that if it is represented to the Registrar on materials placed before him by a contributory or a creditor or any other person interested that (i) the business of the company is being carried on in fraud of its creditors or of persons dealing with the company or (ii) otherwise for a fraudulent or unlawful purpose, he may call upon the company to furnish any information or explanation on matters specified in the order after giving the company an opportunity of being heard. The said representation must be by a contributory or creditor or a person interested and it must be on materials showing that the business of the company is being carried on in fraud of creditors or members or other persons dealing with the company or otherwise for a fraudulent or unlawful purpose. If he is satisfied that the representation is frivolous or vexatious he has to disclose the identity of such informant to the company, presumably, to enable the company to take such action against him as it thinks fit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting power or on the Registrar's report. Section 234, besides, has nothing to do with investigation as section 235 and section 237 have, though on a report under section 234, the Government can institute investigation under clause (e) of section 235. Section 10E was inserted in the Act by Act LIII of 1963 and deals with the constitution of the Company Law Board. The Board constituted under this section consists of a Chairman and members. By a notification G.S.R. 176 dated February 1, 1964, the Central Government constituted the Company Law Board under section 10E. By another Notification G.S.R. No. 178 it delegated some of its powers under the Act including those under section 237 to the Board. On the same day, it also published Rules under section 642(1) read with section 10E(5), called the Company Law Board (Procedure) Rules, 1964. Rule 3 empowers the Chairman of the Board to distribute the business of the Board among himself and the other member or members and to specify the cases or classes of cases which shall be considered jointly by the Board. On February 6, 1964, the Chairman, under the power vested in him by rule 3, passed an order distributing the business of the Board be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond respondent as his father and guardian. The said minor son attained majority on April 27, 1947. but he gave notice of election to become a partner only on April 5, 1952. It was said that this fact indicated that the second respondent maintained his interest till April, 1952. According to the second appellant, the second respondent's active interest in the firm did not cease even after 1952. Mr. Setalvad pointed out to a letter dated March 30, 1965, from Kali Chemie to the manager of the firm in which the German concern acknowledged their gratitude towards the second respondent in the following terms : "Moreover, we thank you for your good suggestion and reminder as to the next step to be taken; the production partly to be taken up in India. We owe special thanks to Mr. T.T. Krishnamachari for his readiness to put up the necessary plant. We gave you previously the assurance to consider such a question always favourably and we repeat that assurance." The letter further suggested that the installation of the plant referred to therein should not be rushed through "unless there are other reasons, for instance import policy for certain preparations and/or equipment for pharmaceutica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T.T.K. & Co. in spite of his denial, (ii) the trade rivalry between the appellant-company and M/s. T.T.K. & Co., (iii) the attempt of that firm to have control or at least a substantial interest in the appellant-company through a collaboration agreement with the German company, and (iv) of personal animosity. He contended that with this background the appellant-company should have been afforded an opportunity to establish its case of mala fides by being allowed to cross-examine the second respondent and the Chairman of the Board and of adducing further documentary evidence by compelling the respondents to produce such documents as were required by the appellants to establish their case. His contention was that the High Court erred in turning down the applications for cross-examination and production of documents. He also argued that under section 10E(1) the first respondent Board was only a delegate of the Central Government and, therefore, the impugned order, though passed by the Board, was the order of the Government and the second respondent being the head of the department, that fact coupled with his agreement of that order, made the impugned order both in fact and in law his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, the appellants do not disclose any information on which they were founded No particulars as to the alleged discussion with the second respondent, or of the petition which the said two friends were said to have made, such as its contents, its time or to which authority it was made are forthcoming, fit is true that in a case of this kind it would be difficult for a petitioner to have personal knowledge in regard to an averment of mala fides, but then where such knowledge is wanting he has to disclose his source of information so that the other side gets a fair chance to verify it and make an effective answer. In such a situation, this court had to observe in the State of Bombay v. Purushottam Jog Naik [1952] SCR 674, that as slipshod verifications of affidavits might lead to their rejection, they should be modelled on the lines of Order XIX, rule 3, of the Civil Procedure Code, and that where an averment is not based on personal knowledge, the source of information should be clearly deposed. In making these observations this court endorsed the remarks as regards verification made in the Calcutta decision in Padmabati Dasi v. Rasik Lal Dhar [1990] ILR 37 Cal 259. Apart from this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for cross-examination in order to arrive at the truth. As observed in A.P.S.R.T. Corporation v. Satyanarayan Transports AIR 1965 SC 1303, 1307, if the evidence led by the parties is tested by cross-examination, it becomes easier to determine where the truth lies. In B. Venkatarathnam v. Registrar of Co-operative Societies, Andhra Pradesh CA No. 321 of 1965, decided on 6-5-1965, where allegations similar to the ones made in the present case were made, this court recognised the right of a party to apply for cross-examination. But the position in the present case is not as it was in that case. The appellants no doubt applied for cross-examination and production of certain documents, but the High Court felt that this was not a case where it should exercise its discretion as the cross-examination of the two deponents would not serve any useful purpose. The view of the High Court was that even if the two deponents were to be called they could in the circumstances of the case only repeat their denials in the affidavits in answer to the allegations made in the petition and the affidavit-in-rejoinder and, therefore, such cross-examination would not take the court any further than the affida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence and the absence of bona fides with which the court in such a case is concerned is that of the Board and not of the second respondent. As observed in Partap Singh v. State of Punjab AIR 1964 SC 72, 81 an allegation as to bad faith or indirect motive or purpose cannot be held established except on clear proof thereof. In the absence of any materials relating to the mala fides of the Board, and in particular, of materials to show that the order was passed at the dictate of the second respondent, this part of the appellants' case must fail. But the contention which calls for a more serious consideration is that the circumstances disclosed in paragraph 14 of the Chairman's affidavit and on which he is said to have formed his opinion were circumstances extraneous to section 237(b) and hence, the order was ultra vires the section. The contention was a two-fold one, (1) that though under clause (b) the opinion of the authority is subjective, there must exist circumstances set out in the clause which are conditions precedent for the formation of the opinion, and (2) that assuming that this is not so, since the Chairman has disclosed the circumstances on which he formed the opinion, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that function to the authority, the court cannot go behind its opinion and ascertain whether the relevant circumstances existed or not. The question is which of the two constructions is correct ? In Emperor v. Sibnath Banerjee [1944] FCR 1; [1943] FLJ 151, 166, 181, one of the questions which arose was with regard to the interpretation of the words "the Central Government or the Provincial Government, if it is satisfied with respect to a particular person" in rule 26 of the Defence of India Rules, 1939. What was questioned there was the correctness of the recital in the detention order that the Governor was satisfied that with a view to preventing the detenu from acting in a certain manner certain action was necessary. It was held that though the court could not be invited to investigate the sufficiency of the material or the reasonableness of the grounds on which the Governor was satisfied, if the contention was that the Governor never applied his mind and, therefore, he could not have been satisfied, the court could enter into that question, the ingredient of satisfaction being a condition precedent to the exercise of power notwithstanding the satisfaction being subjective a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Government and the question of satisfaction could not be challenged except on the ground of mala fides, the grounds on which it was founded must have a rational connection with the objects which were to be prevented from being attained. At page 176 it is stated : "If, therefore, the grounds on which it is stated that the Central Government or the State Government was satisfied are such as a rational human being can consider connected in some manner with the objects which were to be prevented from being attained, the question of satisfaction except on the ground of mala fides cannot be challenged in a court." This view was again emphasised in Shibban Lal Saksena's case (supra), where it was said that the power of detention being entirely dependent on the satisfaction of the appropriate authority, the question of sufficiency of the grounds on which such satisfaction is based cannot be gone into provided they have a rational probative value and are not extraneous to the scope and purpose of the statute. This principle is not exclusively applicable to cases under such measures as the Defence of India Act or the Preventive Detention Act and has been applied also in the case of oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act but had to be read within the four corners of Statute 30 and not outside it. In this sense action on matters extraneous to the statute conferring power is a species of the vice of ultra vires. These two are sometimes inter-related and slide into each other. When a power is exercised for a purpose or with an intention beyond the scope of or not justified by the instrument creating it, it would be a case of fraud on power, though no corrupt motive or bargain is imputed. In this sense, |f it could be shown that an authority exercising power has taken into account, it may even be bona fide and with the best of intentions, as a relevant factor something which it could not properly take into account in deciding whether or not to exercise the power or the manner or extent to which it should be exercised, the exercise of the power would be bad (see Partap Singh v. State of Punjab AIR 1964 SC 72). Thus apart from an authority acting in bad faith or from corrupt motives it may also be possible to show that "an act of the public body, though performed in good faith and without the taint of corruption, was so clearly founded on alien and irrelevant grounds as to be outside the authority co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tanding the subject-matter of the inquiry and making representations thereon. The contention was that the only duty cast on the Commissioner was to satisfy himself of the facts set out in the Regulation, that the test was a subjective one and that the statement as to that satisfaction in his affidavit was a complete answer to the contention of the respondents. Rejecting the contention, the Privy Council observed : "Their Lordships feel the force of this argument, but they think that if it could be shown that there were no grounds upon which the Commissioner could be so satisfied, a court might infer either that he did not honestly form that view or that in forming it he could not have applied his mind to the relevant facts." Though an order passed in exercise of power under a statute cannot be challenged on the ground of propriety or sufficiency, it is liable to be quashed on the ground of mala fides, dishonesty or corrupt purpose. Even if it is passed in good faith and with the best of intention to further the purpose of the legislation which confers the power, since the authority has to act in accordance with and within the limits of that legislation, its order can also be chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority confers powers on a minister or official. However read, they must be intended to serve in some sense as a condition limiting the exercise of an otherwise arbitrary power. But if the question whether the condition has been satisfied is to be conclusively decided by the man who wields the power the value of the intended restraint is in effect nothing. No doubt he must not exercise the power in bad faith ; but the field in which this kind of question arises is such that the reservation for the case of bad faith is hardly more than a formality." The Privy Council held that the aforesaid words in Regulation 62 imposed a condition that there must in fact exist such reasonable grounds known to the Controller before he could validly exercise the power of cancellation. Therefore, though the belief of the Controller that the dealer was unfit was subjective, existence of reasonable grounds on which the belief could be founded was objective and a limitation on his power. In Ridge v. Baldwin [1964] AC 40, 73, Lord Reid suggested the same construction of similar words occurring nowadays in several statutes. Speaking about the rules of natural justice not having been abandoned as a sac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s seems certain that the action (winding up) would not be taken up without scrutinising all the evidence and checking and re-checking all the findings. " Distinguishing a case arising from a statute like the Banking Companies Act from cases of detention and associations declared unlawful, he emphasised the fact that "the factual background will not be one of suspicion, and action will be based on concrete facts ". The majority view thus vindicated the validity of the provision on the ground that, under the power conferred thereby, the Reserve Bank had to determine, albeit instead of the court, the issue whether the continuance of a particular banking company was detrimental to the depositors' interests. Though the words used were "in the opinion of", the opinion, though exclusively of the Reserve Bank, was dependent on the determination by it of the aforesaid issue. Therefore, the words, "reason to believe" or "in the opinion of" do nor always lead to the construction that the process of entertaining "reason to believe" or "the opinion" is an altogether subjective process not lending itself even to a limited scrutiny by the court that such "a reason to believe" or "opinion" was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are suggestive of the crucial matters set out in the three sub-clauses. It is hard to contemplate that the legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded, It is also not reasonable to say that the clause permitted the authority to say that it has formed the opinion on circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose. It is equally unreasonable to think that the legislature could have abandoned even the small safeguard of requiring the opinion to be founded on existent circumstances which suggest the things for which an investigation can be ordered and left the opinion and even the existence of circumstances from which it is to be formed to a subjective process. This analysis finds support in Gower's Modern Company Law (2nd edition), page 547, where the learned author, while dealing with section 165(b) of the English Act observes that "the Board of Trade will always exercise its discretionary power in the light of specified grounds for an appointment on their own motion " and that "they may be trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch alleges that there was no material from which the Board could form the opinion and that no such opinion was in fact formed. In that paragraph, the Chairman has stated as follows : "With reference to paragraph 21 of the petition I have already stated above (which means paragraph 14) that there was ample material before the Board on which it could and had formed the opinion that there were circumstances suggesting " etc. The "ample material" referred to in this paragraph is obviously the material from which the circumstances stated in paragraph 14 of his affidavit were deduced. But the learned Attorney-General argued that paragraph 14 was an answer to paragraphs 1 to 19 of the petition where the petitioners claimed the soundness of the company and, secondly, that if paragraph 14 were to be construed as disclosing the circumstances, it must be read along with paragraph 16 and that if so read they were capable of showing that there were materials suggesting intent to defraud, misfeasance misconduct, etc. Paragraph 14 no doubt states that it is. in reply to paragraph 1 to 19 of the petition. In this paragraph, the facts stated in paragraph 1 to 19 are admitted as being substantiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf of their face value and of some eminent persons having severed their connection with the company would suggest that all was not well with the company or its management and that its management was conducted with the intent to defraud. He argued that in any event they would suggest that those responsible for it were guilty of at least misfeasance or misconduct. The expression "with intent to defraud" connotes an intention to deprive by deceit. Construing section 165 of the Companies Act, 1862, Buckley J. in In re London and Globe Finance Corporation Ltd. [1903] 1 Ch. 728, 732, distinguished deception and fraud as follows : "To deceive is, I apprehend, to induce a man to believe that a thing is true which is false, and which the person practising the deceit knows or believes to be false. To defraud is to deprive by deceit : it is by deceit to induce a man to act to his injury. More tersely it may be put, that to deceive is by falsehood to induce a state of mind; to defraud is by deceit to induce a course of action." Lord Esher also said much the same thing in Le Lievre Dennes v. Gould [1893] 1 QB 491, 498. "A charge of fraud is such a terrible thing to bring against a man that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their connection by some eminent persons cannot by themselves suggest an intent to defraud or fraudulent management. As regards misfeasance or misconduct, it is not suggested in any of the affidavits, though the Board had before it the memoranda of the four directors, that the circumstances set out in paragraph 14 of the Chairman's affidavit had arisen as a result of any fraud or dishonesty on the part of the second appellant or that it was his act which had caused pecuniary losses to the company. Mere bungling or faulty planning cannot constitute either misfeasance or misconduct. But assuming that these circumstances were to be treated as suggestive of misfeasance and/or misconduct, the impugned order is an integral and indivisible order and the investigation ordered thereunder is not and by the very nature of it cannot be confined to finding out only misfeasance and/or misconduct. In this view, the order must be held as being beyond the scope of clause (b) and cannot be sustained. The next challenge is that the order contemplated by section 237(b ) being the order of the Central Government or the Board it must be that of the Board and not of its Chairman. The contention was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the Tribunal under section 10B nor does it provide for the distribution of work entrusted to the Board. It is true that sub-section (5) confers power on the Government to prescribe procedure. But that procedure is of the Board. If the legislature intended that the Board should act by dividing its work amongst the members, there was no obstacle in its way to provide for benches as is done under section 10B. Section 637(1)(a) empowers the Government to delegate its power to the Board, no doubt, under such conditions, restrictions or limitations as may be specified in the notification delegating such power. But the notification by which the Government delegated its power contains no conditions, limitations or restrictions. A provision enabling the Chairman to distribute the powers and functions delegated to the Board is not a provision prescribing conditions, limitations or restrictions. Section 637(1)(a), which authorises the Government to delegate its power, clearly lays down that such delegation is to be made to the Board and no one else. Under sub-section (2) of section 637 certain powers and functions therein set out cannot be delegated to any other authority. The section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the Board of Trade. It appears from this very passage that the Board was constituted by an order-in-council dated August 23, 1786, and consisted of the President and the holders of certain offices therein specified. But it is the President who takes the oath of allegiance and the official oath and it is he alone for all practical purposes who constitutes the Board. In point of fact certain statutes and orders-in-council have empowered the President who is a senior Minister or one of the junior ministers to act on behalf of the Board (Hood Phillips : Constitutional and Administrative Law ; 3rd Ed, 331). That being so, there is no question of distribution of work or delegation of power by the Board to the President. The statute conferring power on the Board of Trade itself has authorised the President to act on behalf of the Board. That Board set up under section 10E therefore cannot bear analogy with the Board of Trade. Nor does that section or section 637 empower, as is the case with the Board of Trade, the Chairman to exercise or discharge the Board's powers and functions. The statute having permitted the delegation of powers to the Board only as the statutory authority, the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistrar to call for information or explanation and to take action where such information or explanation is not forthcoming. Under section 234 there is no power to order investigation either in the Registrar or the Government. Under section 235, no doubt, the Government can appoint inspectors but it can do so under the three specified cases set out therein. What sections 235 and 236 do is to give power to shareholders on the one hand and the Registrar through a report on the other hand to move the Government to take action. These sections do not authorise the Government to appoint inspectors suo moto as in the case of section 237(b). The discretionary power directing an investigation is contained in section 237(b). Therefore section 234, section 235 and section 236 and section 237(b) give powers to different authorities, viz., the Registrar and the Government, provide powers which are different in extent and nature, exercisable in sets of circumstances and in a manner different from one another. Therefore, there is no question of discriminatory power having been vested in the Government under these sections to pick and choose between one company and the other. The challenge under ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eft in charge of persons who manage the affairs of the companies it would be legitimate to treat such companies and their managers as a class by themselves and to provide for necessary safeguards and checks against a possible abuse of power vesting in the managers. " If sections 234 to 237 are viewed from this point of view, there would be no difficulty in coming to the conclusion that there is neither the violation of article 14 nor of article 19(1)(g). To these observations may be added the observations of the Company Law Committee in their report of 1952, where the Committee have noted that the need for a provision for investigation was generally recognized. While recognising that in some -cases the use of the powers of inspection and investigation may shake the credit of the company and affect its competitive position, the Committee observed that such a risk "should not, however, deter us from considering the desirability of conferring adequate powers on an appropriate authority to investigate the affairs of a company where such investigation is prima facie called for". Similar observations are also to be found in the Report of the Company Law committee presented to the Britis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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