TMI Blog1988 (7) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : "( 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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". 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 Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned 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..." 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 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. 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 : 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vides 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he materials on the basis of which the decision was taken by the Company Law Board in this behalf. 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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".(p. 619) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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, con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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