Tadi Adinarayana Reddy vs Union of India and Others

M.H.S. Ansari, J.—The petitioner seeks an appropriate writ declaring the inaction on the part of respondents Nos. 1 and 2 to take necessary action against respondents Nos. 4 and 5 for their acts of omission and commission as arbitrary and illegal and for a consequential direction to respondents Nos. 1 and 2 to forthwith direct prosecution of respondents Nos. 4 and 5 in accordance with law.

The petitioner claims to be a joint shareholder along with his maternal uncle, Sri Nallamilli Venkata Reddy. The petitioner along with other family members claims to own 3,723 equity shares in the third respondent company which is incorporated under the Indian Companies Act. The case of the petitioner is that the third respondent company is a public limited company and respondent No. 4 is the chairman and managing director whilst respondent No. 5 is the joint managing director of the third respondent company. It is averred that respondents Nos. 4 and 5 illegally siphoned off monies and through their agents, formed three benami firms which were raided by the Income Tax authorities and the amounts recovered from the said firms are said to be the amounts diverted by respondents Nos. 4 and 5. Several acts of omissions and commissions have been listed in the affidavit filed in support of the above writ petition apart from attributing mismanagement and misappropriation of the funds of the third respondent company. It is further averred that the share capital was increased, yet the production and sales have fallen. In paragraph 13 of the affidavit filed in support of the above writ petition, it is stated that the several acts of omissions and commissions were brought to the notice of higher authorities. No action has been taken. It is further submitted therein that in matters of this kind, it is not necessary even to make an application because there is a statutory duty cast on the authorities to ensure that there is no misappropriation of public funds. As no action has been taken by the authorities, the petitioner has filed the above writ petition.

In the interlocutory applications filed along with the writ petition, relief is sought for directing an enquiry by the Central Bureau of Investigation and in another interlocutory petition filed by the petitioner, the prayer is made for appointment of an interim administrator to take charge of the affairs of the third respondent company.

Sri S. Ramachander Rao, learned senior counsel appearing for the petitioner, represented that Company Petition No. 15 of 1994 has been filed by some of the shareholders before the Company Law Board and evidence has been placed before the said authority with regard to the aforesaid acts of mismanagement, misappropriation, diversion of funds, etc. It was contended by learned counsel for the petitioner that in spite of some shareholders having invoked the jurisdiction of the Company Law Board under the provisions of the Indian Companies Act, no fruitful results have emanated and it was, therefore, submitted that the petitioner is justified in invoking the extraordinary jurisdiction of this court under article 226 of the Constitution of India.

It must be noted here that the application filed before the Company Law Board is one under sections 397, 398 and 403 of the Companies Act for a declaration that respondents Nos. 4 and 5 herein who are respondents Nos. 2 and 3 before the Company Law Board are not fit and proper persons to continue and hold office as directors and for removing them from the said post of managing director and joint managing director and for appointment of an interim administrator for running the day to day affairs of the company.

It was the submission of Sri S. Ramachander Rao, learned senior counsel, that the various acts of omissions and commissions listed out in the affidavit amply demonstrate that respondents Nos. 4 and 5 have been guilty of misappropriation, mismanagement and that the third respondent company has borrowed monies from public institutions and, therefore, public money is also involved and respondents Nos. 1 and 2 are, therefore, bound to perform their statutory duty to take appropriate action against respondents Nos. 4 and 5. A writ of mandamus to compel respondents Nos. 1 and 2 to perform their statutory duty needs to be issued, contends learned senior counsel for the petitioner.

The Companies Act, 1956, is an Act to consolidate the law relating to companies and certain other institutions. Authorities have been constituted and provisions made for the investigation of the affairs of the company under the Companies Act.

u/s 235, the Central Government on a report made by the Registrar under sub-section (6) of section 234 or under sub-section (7) of that section may appoint one or more competent persons as inspectors to investigate the affairs of a company.

Under sub-section (2) of section 235, on an application from not less than 200 members or from members holding not less than one-tenth of the total voting power, the Company Law Board has been conferred the power to declare that the affairs of the company ought to be investigated by an inspector or inspectors and on such a declaration being made, the Central Government shall appoint such inspectors to investigate the affairs of the company. After the Companies (Amendment) Act, 1988, with effect from May 31, 1991, although the power to appoint inspectors to conduct investigation and to act on the reports of the investigation would remain with the Central Government, the Company Law Board has to express its opinion as regards the existence or otherwise of the circumstances calling for investigation referred to in clause (b) of section 237. But, before ordering an investigation, the Company Law Board is expected to satisfy itself that there exist circumstances which suggest 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 to any of its members or that the persons concerned in the formation or management of the affairs of the company are guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members or that the members of the company have not been given all the information with respect to the affairs of the company.

The Companies Act thus provides a forum in the form of the Company Law Board to consider the grievance as made out by the petitioner in the writ petition and is empowered to issue appropriate orders thereon. When such a forum statutorily constituted exists, it is but appropriate that resort to article 226 should be discouraged in view of the efficacious alternative remedy available under the statute. Under the Companies Act, a more satisfactory solution is thus available to the petitioner. In fact, some of the shareholders have, as noticed above, initiated proceedings before the Company Law Board. The grievance of the petitioner, however, is that no orders have yet been passed thereon. That cannot constitute a ground for invoking the jurisdiction of this court under article 226 of the Constitution of India.

Sri E. Manohar, learned senior counsel representing respondents Nos. 2, 4 and 5, made certain oral submissions at the stage of admission of the above writ petition and it was his submission that earlier an Application No. 7 of 1994 was filed before the Company Law Board on February 24, 1994, and upon filing the counter on March 4, 1994, the petitioners before the Company Law Board sought permission for filing an amendment petition and instead they have withdrawn the earlier Petition No. 7 of 1994, and filed a fresh Petition, C.P. No. 15 of 1994, on April 7, 1994, and the matter, it is submitted by Sri E. Manohar, learned senior counsel, is being adjourned and the delay in the completion of the case is attributable to the petitioners before the Company Law Board.

Sri E. Manohar, learned senior counsel, also referred to certain observations made by the Supreme Court in Rohtas Industries Vs. S.D. Agarwal and Others, . The Supreme Court dealt with powers conferred under sections 235 - 237 of the Companies Act. In the said judgment, the following observations are relevant and may need to be borne in mind (page 800) :

"Coming back to section 237(b), in finding out its true scope we have to bear in mind that that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. In interpreting section 237(b), we cannot ignore the adverse effect of the investigation on the company."

In the view that I have taken in the matter, it may not be necessary to refer to certain other decisions of the Supreme Court referred to by Sri E. Manohar, learned senior counsel, which dwell upon the formation of an opinion as to the existence of circumstances suggesting that the company''s business was being conducted as laid down in sub-clauses (i), (ii) and (iii) of section 237(b) which is a condition precedent for the Central Government prior to the amendment of the Companies Act and now for the Company Law Board to form the required opinion for directing investigation into the affairs of the company.

In the light of the above, I see no ground to entertain the above writ petition and the same is accordingly dismissed.