TMI Blog1991 (5) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent, Union of India, through the Secretary, Ministry of Finance. The facts which have been set out in the show-cause notice for proceeding under the Act have not been disputed by the petitioners for the purpose of this petition. These facts may briefly be set out. Shaw Wallace and Co. Ltd. (Shaw Wallace) is a public limited company registered under the laws of this country in India. 38.7% of the shares of Shaw Wallace are held by R. G. Shaw and Co. Ltd. and its three subsidiaries (1) Shaw Darby and Co. Ltd., (2) Shaw Scott and Co. Ltd., and (3) Thames Rice Milling Co. Ltd. (collectively hereinafter referred to as "R. G. Shaw Companies"). All these four companies are registered under the laws of the United Kingdom and have their registered offices in Bromley, Kent and U.K. Carrasco Investments Ltd. (Carrasco) is a company incorporated in Hong Kong. Another company, Sime Darby East Ltd., is also incorporated in Hong Kong (Sime Darby Hong Kong) and yet another company, Sime Darby Barhad in Kuala Lumpur, Malaysia (Sime Darby Kuala Lumpur). Under an agreement dated January 21, 1985, between the Carrasco and Sime Darby Hong Kong and Sime Darby Kuala Lumpur, Carrasco purchased s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of sections 29(1) and 47 of the Act. He also noted that under section 68(1) of the Act, the company and every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, would be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly, and as such, according to the Special Director, Mr. M. R. Chhabria (Dubai), Mr. K. R. Chhabria (London), Horace W. Longlois (Singapore), Mr. Ahmed Sobri (Kuala Lumpur) and H. A. Tajuddin (Kuala Lumpur) were the directors of Carrasco, Hong Kong, and were in charge of and responsible to that company for the conduct of its business during the relevant period. The Special Director also prima facie reached the conclusion that by acquiring the shares of Shaw Wallace without the permission of Reserve Bank of India (RBI), Carrasco and its directors, M. R. Chhabria, K. R. Chhabria, Horace W. Longlois, Ahmed Sobri and H. A. Tajuddin contravened the provisions of section 29(1) of the Act and thereby rendered themselves liable to be proceeded against under section 50 of the Act. Similarly, it appeare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice dated October 16, 1985, was also withdrawn. Both the actions in withdrawing the prosecution and also the opportunity notice were done on the request made by Carrasco under the signature of K. R. Chhabria, director, by its letter dated January 21, 1987. This letter is addressed to Mr, Bhurelal, the then Director, Enforcement Directorate. It was stated in this letter that there was no contravention of any provisions of the Act but with a view to avoid controversy and litigation a request was made that the lapse, if any, might be condoned and in these premises an apology was tendered for such lapse, if any. The matter was considered at the highest level in the Government of India. Both Mr. M. R. Chhabria and Mr. K. R. Chhabria met the Director of Enforcement tendering an apology and requesting to adjudicate the case expeditiously and grant amnesty from prosecution. The Revenue Secretary recorded on February 13, 1987, the following note : "I have already submitted my proposal regarding United Breweries Ltd., Bangalore, and Shri Vijay Mallya, chairman and managing director of the company. We have the following cases against Carrasco Investments Ltd., Hong Kong, and Chhabria br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there has not been any contravention of the provisions of the Act and to show that bonus shares in respect of shares held by the R. G. Shaw companies were allowed to be issued by the Reserve Bank of India by its letter dated March 14, 1988, and further that the Reserve Bank of India even permitted the remittance of dividends on these shares and also that petitioners Nos. 6 and 7 were appointed directors at the annual general meeting of Shaw Wallace and the Central Government had accorded its approval under section 269(1) of the Companies Act. The Special Director refused to summon any record. The petitioners appeared before him under protest and raised all their objections to the issuance of the show-cause notice and the continuance of the adjudication proceedings thereunder. For the last time, the hearing before the Special Director was fixed for November 21, 1986. The petitioners wrote a letter seeking adjournment on the ground that an adjourned extraordinary general meeting of Shaw Wallace was to be held at Calcutta on the 19th, 20th and 21st November, 1986, as directed by the Supreme Court and a certain report was to be submitted by the chairman appointed for the meeting. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orce in India or in which the non-resident interest is more than forty per cent, or any branch of such company, shall not, except with the general or special permission of the Reserve Bank, . ( b ) acquire the whole or any part of any undertaking in India of any person or company carrying on any trade, commerce or industry or purchase the shares in India of any such company." "47. Contracts in evasion of the Act ( I ) No person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of this Act or of any rule, direction or order made thereunder." Though the show-cause notice refers to contravention of section 29(1), there is no dispute between the parties that the contravention is respecting clause ( b ) of sub-section (1) of section 29 of the Act. The respondents have questioned the jurisdiction of this court in this petition and said the adjudication proceedings were neither withdrawn nor dropped at any stage. They denied that the show-cause notice and the adjudication proceedings were without jurisdiction or that there was any delay making the proceedings stale and illegal. They said the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the facts mentioned in the show-cause notice there was contravention of section 19(5) as well and the provisions of section 47(1) read with section 19(5) were, therefore, also attracted. Section 19(5) is as follows : "19. (5) Notwithstanding anything in any other law, no transfer of any share of a company registered in India made by a person resident outside India or by a national of a foreign State to another person whether resident in India or outside India shall be valid unless such transfer is confirmed by the Reserve Bank of India on an application made to it in this behalf by the transferor or the transferee." The argument was that even though section 19(5) has not been" specifically mentioned in the show-cause notice that fact in itself would not come in the way of the first respondent holding that the petitioners did contravene that provision. To support this argument, reliance was sought to be placed on Chapter XVII (sections 211 to 224) of the Code of Criminal Procedure dealing with framing of charges in a criminal trial. We do not think any such parallel can be drawn. Proceedings before the Special Director are quasi-judicial in nature. The show-cause n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioners were, therefore, quite well within their rights to request the Special Director to summon the relevant record from the Company Law Board as well as from the Reserve Bank of India to show that the show-cause notice was not valid and there had not been any contravention. The Special Director had power to summon the record or even the persons to give evidence under sections 40 and 53 of the Act. As noted above, proceedings before the Special Director are not in the nature of a trial under the Code of Criminal Procedure where the accused enters into his defence after the prosecution closes its case. Here the burden was on the petitioners and in our opinion the Special Director grossly erred in not summoning the records as requested by the petitioners thus causing serious prejudice to the petitioners in the defence of their case. The Special Director failed to exercise jurisdiction vested in him by law. The argument that the petitioners were possessed of records of Shaw Wallace is not of any consequence and is no substitute for the official records of the department of the Government or other authority. The petitioners did not press the proposition that the adjudication pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a advised the Enforcement Directorate to approach the Ministry of Law to ascertain the correct legal position. Section 26(4) is as follows : "26. (4) Notwithstanding anything contained in any other law, no transfer of any interest in any business in India made by a person resident outside India to any person also resident outside India shall be valid unless such transfer is confirmed by the Reserve Bank on an application made to it in this behalf by the transferor or the transferee." The Enforcement Directorate did not, however, seek the opinion of the Ministry of Law and it was recorded on August 4, 1987, that it was not advisable to refer the matter to the Ministry of Law because of the pendency of the adjudication proceedings. By that time, it appears the judgment of the Madras High Court had not come. That is, however, a different matter. The fact, therefore, remains that up to August 1987, the adjudication proceedings file was being dealt with in the Enforcement Directorate. It appears to us that the petitioners were quite well aware of the pendency of the adjudication proceedings inasmuch as they had been writing to the adjudicating authority for commencement and conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e vote of Government financial institutions which controlled 25.32% of the shares, and, subsequently, appointment Of the seventh petitioner as chairman of that company and also its managing director, the approval having been granted by the Central Government under section 269(1) of the Companies Act, 1956, and (7) the Reserve Bank of India having taken a similar view in other cases particularly with reference to section 26(4) of the Act. We however, do not think that all these circumstances either individually or cumulatively would make us draw any such inference of dropping or abandoning the adjudication proceedings in the face of the specific orders that adjudication proceedings would go on and the petitioners themselves requesting the adjudicating authority to take a lenient view in the adjudication proceedings. Delay itself cannot be fatal. There is no conduct on the part of the Special Director, the adjudicating authority, from which it could be inferred even remotely that adjudication proceedings were abandoned or even dropped. There has to be a specific order for doing the same. If reference is made to the Adjudication Proceedings and Appeal Rules, 1974, mentioned above, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal hearing on March 29, 1989, was fatal. There is nothing to suggest on the basis of the record that the issue of this notice was not bona fide or the adjudicating authority in issuing this notice abused its power or acted in excess of it. There is nothing unfair in the exercise of powers by the adjudicating officer. It does, however, appear rather queer to us that on the basis of the apology on the one hand the Central Government withdrew the opportunity notice but at the same time the adjudication proceedings were allowed to continue. That itself, however, will not make the proceedings void. No representation either in writing or even by conduct was made by the adjudicating authority to the petitioners that the proceedings would be dropped. In fact, as noted above, the adjudicating authority had to pass an order in writing either levying the penalty or withdrawing the notice after having thought fit to hold the adjudication proceedings. The petitioners cannot have any grievance on this score. We find in this case that the adjudicating authority, a public authority, has acted within the scope of the powers conferred upon him. It will be better here to analyse the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly did not amount to more than a right to participate in the profits of the company. Whatever the rights of the shareholder, these have been spelled out by the Supreme Court in the case, Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 ; AIR 1986 SC 1370; at page 1412, para 84, but these we need not refer to. It is well-settled that a company is a juristic person and is distinct from its shareholders and it is the company which owns the property and not the shareholders. When in the show-cause notice in one of the recitals it is mentioned that Carrasco acquired 38.7 per cent, of the undertaking of Shaw Wallace, it only meant that Carrasco acquired 38.7 per cent, of the shares of Shaw Wallace. In fact this is made clear in the subsequent paragraph where it is said that by acquiring the shares of Shaw Wallace the noticees rendered themselves liable to be proceeded against under section 50 of the Act. There is nothing as 38.7 per cent, of the undertaking of a company. An undertaking of a company is a different thing from the shares of the company. In Carew and Company Ltd. v. Union of India, AIR 1975 SC 2260 ; [1976] 46 Comp Cas 121 , the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act might suffer from extra-territorial application for want of a necessary nexus. It is not disputed before us that the R. G. Shaw companies validly held the shares of Shaw Wallace, an Indian company. In somewhat similar circumstances in a case pertaining to R. Venkataswaviy Naidu v. Director, Enforcement Directorate [1993] 78 Comp Cas 87 pending in the High Court of Judicature at Madras, the Enforcement Directorate took the stand that no non-resident interest in the business of South India Viscose had been transferred and that Sapina, a foreign company, was still holding those shares and the changes in the ownership of Sapina was an internal matter of that company. It was stated that section 26(4) of the Act did not apply. No reasons have been given to us to show as to why a different stand is now being taken by the Enforcement Directorate before us. The Reserve Bank of India also filed an affidavit in the proceedings in Madras and said that it was not correct to say that the shareholding itself gave an interest in the business in India and that it was not correct to say that the transfer or take over of Sapina by another foreign company outside India was in fact and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istration of such alleged transfer of shares, and that therefore, it had to be presumed that no transfer had taken place. Again, as noted above, the Reserve Bank of India had taken the stand that there had not been any violation of section 26(4) of the Act. The court, therefore, observed that as far as the Director of Enforcement and Reserve Bank of India were concerned, there was no transfer of shares and there was no violation of section 26(4) of the Act. The court also noticed that not a single document relating to alleged transfer of shares had been produced and the registers of South India Viscose Company did not show that there had been any application by the transferor or the transferee for registration of shares on transfer. As a matter of fact, after the learned single judge had dismissed the writ petition as wholly misconceived, the matter was considered by the Appellate Bench (see p. 90 F h of [1993] 78 Comp Cas) where the argument of transfer of shares had been given up. The only argument raised was that there was transfer of interest. In the circumstances of the case, this argument did not find favour with the Appellate Bench as well. One of the questions before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not consider it necessary to lift the corporate veil for ascertaining the real owner as the shares stood and continued to remain in the name of the R. G. Shaw companies. In the proceedings before the High Court an application had also been made for impleading the Enforcement Directorate and others as parties, but the court did not think it necessary to do so on the submission made by the Enforcement Directorate that various investigations by it were in progress. After examining the various pleas in the matter the court was of the opinion that no case had been made out to justify the application of the principles of lifting the corporate veil to ascertain the true and real ownership of the shares at such sale transaction. The court refused to interfere with the order of the Company Law Board and dismissed the application by order dated November 14, 1986. Mr. Sareen said that in any case contravention of section 47(1) would be there. There is no basis for such a submission. If section 29(1)( b ) itself is not applicable, no question of any evasion or avoidance of this provision arises. Mr. Andhyarujina is right in his submission that section 47(1) cannot be read independently of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd some scheme, and that where the Act required the corporate veil to be lifted it said so. The Supreme Court in this case also observed that the provisions of the Act did not appear to stipulate that the purchase of shares without the permission of the Reserve Bank would be void and that permission could be granted even ex post facto. The show-cause notice in the present case appears to have been sent merely on the basis of the agreement dated January 21, 1985, and the statement of Mr. M, R. Chhabria and without more. If there was any other investigation we would not know but some investigation certainly ought to have taken place before issuing such a notice and we wished we were apprised of that. It is correct that the burden of proof is placed on the person proceeded against under the Act to show if he had the requisite permission or not but a case like the present one does not absolve the authority of the duty to investigate the matter beforehand and in any case to come to a prima facie view that permission was in fact necessary and for that purpose it was appropriate to seek the opinion of the Reserve Bank. This was so particularly when an altogether different stand had be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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