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Judgment
K. Veeraswami, C.J.—We are of opinion that this appeal should be dismissed. It is directed against an order of Kailasam J., who, by a cryptic order, dismissed, in limine, the petition filed by the Appellant to quash the decision, dated 5th April 1968 of the Company Law Board to appoint Respondents 2 and 3, in exercise of its powers u/s 237(b) of the Companies Act, 1956, as Inspectors to investigate and report. The Board had before it a report, dated 21st November 1967 of the Deputy Director, Inspection, Company Law Board, Madras, made u/s 209(4), and opined, on a consideration of eight specific matters, that there were circumstances, suggesting that the business of the Company was being conducted with intent to defraud its members and that the persons, concerned in the management of its affairs, had in connection therewith, been guilty of misfeasance or other misconduct towards the Company and its members. The order of Kailasam J. was this:
The materials furnished in. the counter affidavit in paragraph 9A(a) to (g) furnish prima facie material for forming the opinion required in the section. There are no grounds for interference. Petition is dismissed.
Without issuing a rule nisi, the learned Judge would appear to have, by notice called upon the Respondents to produce the necessary material, upon which his first Respondent, the Secretary to the Government of India, Ministry of Industrial Development and Department of Company Affairs, one Mr. Sisir Kumar Datta, filed a long counter-affidavit. We are also told that a copy of the report relied on by the Board was shown to the learned Judge. Before us, have been placed not only a copy of this report bull also copies of two anonymous petitions, dated August 1967 and 12th September 1967 respectively, the first of which was addressed to the Secretary, Department of Company Affairs and Chairman, Company Law and the other to the Deputy Director, Inspection. A copy of the report had been served on the Appellant at the appellate stage and so too the copies of the said complaints during the hearing of the appeal. Elaborate; legal arguments have been addressed to us for the Appellant to show that the Board''s order is procedurally irregular, that, in any case, the report, on which it was based, does not justify or support it, and that the order is, therefore, illegal.
The Appellant, the Rayala Corporation Private Limited, represented by its Managing Director M.R. Pratap, was incorporated on 4th November 1948 as a private limited company by taking over the assets and liabilities of the Madras Office of the firm known as the Rayala Corporation, which was a partnership, on terms contained in a deed, dated 15th December 1943. The authorised capital of the Company, which was originally Rs. 5 lakhs, was raised, from time to time, and it was Rs. 26 lakhs in May 1964. The paid-up capital, as at the end of September 1967, was 16.47 lakhs, made up of 13,200 equality shares of Rs. 100 each and 2,210 preference shares of Rs. 100 each. Originally the subscribers of the Memorandum of Association were the Rajah of Bobbili, his son Kumara Raja of Bobbili, N.R. Rajagopal Naidu and M.R. Pratap each of whom had subscribed for 60 shares. There are at the moment A, B, C and D groups of shareholders, that A group consisting of Rajah of Bobili and his relations, the B group consisting of Pratap and his relations, the C group being a foreign company, Facit AB Sweden, and the last group consisting of preferential shareholders. The total shareholders are 27 in number. The Board of Directors consists of the Rajah of Bolbili, his son Kumar a Rajah of Bobbili, his brother-in-law M.M.G. Appa Rao (whole-time Director) and his son-in-law I, V.M. Krishna Rao functioning as Executive Working Director, all of them representing the A group; Pratap and his cousin M.R. Parasuram consisting the B group of shareholders and one Lennart Schussler representing Facit AB. It appears that until Facit AB was allotted certain preference shares, the A group had held an absolute majority in the Board of Directors. The Company is engaged principally m carrying on the business of manufacture of Halda typewriters, distribution of Facit AB calculators and Adding machines and also sale of automobile parts, and had its branches at Bangalore, Calcutta, Bombay and Delhi. The Company has been quite successful in its business, as evident from the fact that its annual turnover increased from Rs. 17.11 lakhs in 1951 to Rs. 1.49 crores in 1967, with a profit in that year, as it is said, of Rs. 21.56 lakhs.
The first complaint aforesaid sought to bring to the notice of the Department of Company Affairs certain grave regularities that were being committed by M.R. Pratap in the Company and referred to certain specified matters for scrutiny. It said that in December 1966, the company was raided by the Enforcement Directorate and income tax Department simultaneously during the course of which, many incriminating documents were seized relating to the illegal activities indulged by him in the affairs of the company; (f) After the raid, Pratap abolished the purchase department in the company and has routed all the purchases through a firm by name Emmar Industries, 1/155, Mount Road, Madras-2, owned by him and his brothers as well as some friend''s. The firm purchases certain items manufactured by others and supplies the same to the company at an exorbitant price, making a profit of 300 per cent; (ii) Pratap sold certain materials like tool steel, special steel and annodes procured by the company on special actual user''s licence and in its books not three items but some ether items were shown to have been sold with out crediting the company with the full value of the sales; (iii) quite a bit of machinery, that had been paid for by the Company, had not been installed in its premises but is being used in Mysore Metal Industries, Doorvana Nagar, Bangalore-16 and Emmar industries, the former also owned by Pratap and controlled by him and his family members; (iv) the statements of machinery and other stock submitted to the Bank were completely wrong and have been manipulated according to the connivance of Pratap and his chief accountant and very many such bonus transactions were going on all the time, with a view to enrich Pratap at the cost of Government and the shareholders and (v) Pratap had come to an agreement with the Swedish Firm Facti, AV Stockholm, Sweden and also with another Swedish Firm Associated Swedish Steels, who are the suppliers of the raw materials to the company, that they should over invoice all their goods supplied to it by 10 per cent which 40 credited in Pratap''s account in a Swedish bank. The complaint wound up by saying that if Pratap''s activities were not checked in time, it would be only a matter of time before the company was completely ruined and the production stepped, causing the loss of a good industry to the country and ruining the other directors and the share-holders. In the second complaint, it was said that the purchases were made on tender or contract basis and some of these were also routed though Mysore Metal Industries, Bangalore, which would send the materials to its Madras office, adding some profit to the original cost of the materials and, in turn, the Metal Industries, Madras would supply them to the company raising their bill by adding 400% to the value. Yet another allegation was that while according to the resolution of the Board of Directors, a house estimated at Rs. 1,60,000 should be constructed in the same compound, i.e., Villa. Enchantress where Pratap is living and of which he is the owner, he has already spent Rs. 6 lakhs for the construction and this money was nothing but black money earned by him and that he was adjusting the amounts spent for the construction over and above the authorised value in some other accounts and showing the amounts spent till then as Rs. 90,000 or so cheating the other directors as well (as the poor, sincere and honest workers with whose sweat and toil, he was earning money. As a result of these complaints, the Deputy Director, Inspection, Madras was asked apparently by the Ministry of Industrial Development and Department of Company Affairs to carry out inspection and submit his opinion. Therefore, an inspection was duly made of the books and other records of the company by Inspectors duly, authorised to make routine inspection. They made an elaborate inspection and submitted their report on 21st November 1967 u/s 209(4). This formed the basis for the Company Law Board''s order which is now under attack.
The report is an elaborate one running to 93 typed sheets. The books and other documents of the company were examined with reference to the allegations contained in the two complaints we have referred to and certain other matters. The inspection report is in two parts with several annexures therein. The Company Law Board considered in detail the report and took special note of the following facts:
(i) Some of the purchases had been made through the Emmar Industries, a firm in which the close relatives of the Managing Director were partners. There was no contract but a test check revealed that this concern had made profits ranging from 10 to 90 per cent on its supplies to this company.
(ii) The company was purchasing spare parts through Mysore Metal Industries, a firm consisting of the wife and brother of the Managing Director as partners. A test check revealed that on purchase of spare parts this firm has been making profits of over 60 per cent.
(iii) Some of the items of machinery had been diverted to the aforesaid Mysore Metal Industries. The Inspection Report had brought out three instances of diversion of machinery. Machine No. 281 ''Double Barrel Thumbling Unit'' and No. 201 ''Air Compressor'' had been sent to Mysore Metal Industries. These were not the items covered by any agreement.
(iv) The stock as per balance-sheet as on 31st March 1967 was valued at Rs. 4.34 lakhs whereas the value had been declared to be Rs. 0.35 lakhs to the Bank. There are no cost records to satisfactorily explain the difference.
(v) The company had undertaken construction of a building styled a ''Guest House'' on a property obtained on lease from the wife of the Managing Director; Some of the vouchers suggest that the construction is really for the benefit of the Managing Director. For instance, in one voucher No. 652, dated the 25th May, 1966 for about Rs. 5,000 it was mentioned materials purchased for the construction of our M.D.''s house at Villa Enchantress.
(vi) In the course of a search made by the income tax Department an account book styled ''Typewriter'' showed receipts of Rs. 28,125 from the Sarada Agencies and Rs. 10,000 from one Chelur Corporation for the period from 10th November 1965 to 13th November, 1966. It would appear that these represent a return of part of the commission at Rs. 37.50 per typewriter out of the total commission of Rs. 42.50 per typewriter shown in the book.
(vii) The company has leased out the second and third floors of the Eayala Building at Mount Road, Madras to Messrs. Estates Corporation on a rent of Rs. 5,640 per month while this lessee, in turn, gets a rent of Rs. 17,550 per month. The partners of the lessee firm, appear to be nominees and/or friends of the Managing Director.
(viii) Iii September, 1967 two 130 K.V. transformers had been sold to Mysore Metal Industries for a consideration of Rs. 28,000 only when the market value of the same was of the order of Rs. 36,500.
Having set out these facts, the Board in its Order said:
On the above facts the Company Law Board was of the opinion that there are circumstances suggesting that the business of the company is being conducted with intent to defraud its members and that the person concerned in the management of its affairs has in connection therewith been guilty of misfeasance or misconduct towards the company and its members.
It therefore decided in exercise of its powers u/s 237(b) to appoint Shri S.V. Yijayaraghavan, Senior Solicitor, Department of Company Affairs, Company Law Board, Shasta Bhavan, New Delhi, and Srimathi Saraswathi Achuthan, Assistant Inspecting Officer, Company Law Board, Madras as Inspectors, to investigate into the affairs of the company and to report thereon.
We may add that in December, 1967 and April 1968, I, V.M. Krishna Rao belonging to group-A-addressed two separate communications to the then Union Finance Minister which referred to the serious malpractices of Pratap involving over invoicing, maintaining of undisclosed accounts in foreign banks, misappropriation, etc. The communications also mentioned that Krishna Rao accompanied by two gentlemen, one of whom was a Member of Parliament had met the Minister and talked to him about the affairs of the company. The writer of the communications wanted the Minister to expedite the enquiry against the company. These two communications should, as we think, have been before the Company Law Board at its meetings on February 9 and March 16, 1968 to consider the inspection report and also on April 5, 1968, when impugned order u/s 237(b) was made by it.
The validity of the Board''s order is attacked by the Appellant on two broad grounds as we have already mentioned, viz., (i) procedural error and (ii) the Board''s order is bad on its merits. On the first ground it is contended that Section 237(b) could not properly be resorted to on the admission of the Department that the report was ordered for as a result of complaints which had or should have come from members who are Directors of the Company, but the right procedure on receipt of the complaints was to proceed u/s 234(7) read with Section 235(c) or u/s 235(a) and (b) read with Section 236 and not by calling for a report by inspectors u/s 209(4) and the Board passing an order of investigation u/s 237(b) on the basis of such illegal report. Even if the procedure followed were correct, it is next pressed before us, on the second ground that the facts relied on by the Board in support of its order do not show that circumstances existed which suggested the requisite fraudulent intention, misconduct or failure, in order to justify an order u/s 237(b). The Respondents meet the first ground by simply stating that the two complaints were anonymous ones and were not from the members of the Company and the report submitted to the Board was but notes of routine inspection conducted in the Company u/s 209(4). The Board''s order is also sought to be sustained by the Respondents maintaining that it fully satisfies the requisites of Section 237(b).
Let us now turn to the relevant statutory provisions which have a bearing on the controversy. Section 234 provides for power of the Registrar Id call for information or explanation from the company which it is bound to furnish. If in the opinion of the Registrar, the information, explanation or books on papers disclose an unsatisfactory state of affairs or do not disclose a full and fair statement of the matter to which the particular documents purport to relate, he should report in writing the circumstances of the case to the Central Government. This is Sub-section (6) of the section and the basis for eventually making such a report is the Registrar''s opinion formed on perusing any document which the company is required to submit under the Act that any information or explanation is necessary with respect to any matter to which such document purports to relate. In other words, the report contemplated by Section 234(6), id one made by the Registrar on his own in the course of discharging his duties in perusing a document which the company is required to submit under the Act; he is not moved by any one to make it. His starting point, on the other hand, for a report u/s 234(7) is representation to the Registrar by any contributory or creditor or any other person interested. Such representation should be based on materials placed before the Registrar and which should allege that (a) the business of the company is being carried on in fraud of its creditors, (b) or of persons dealing with the company, (c) or otherwise for a fraudulent or unlawful purpose. On receiving such representation, the Registrar Ss empowered to call upon the company by an order in writing to furnish in writing any information or explanation on matter specified in the older. The Registrar can, however, make the order only after giving the company an opportunity of being heard. For enforcing his order of requisition and making a report under Sub-section (7) eventually to the Central Government, Sub-sections (2) to (4) and (6) of Section 234 are made applicable. Sections 235 to 237 empower the Central) Government to appoint in certain circumstanced mentioned therein inspectors to investigate the affairs of a company and to report thereon in the manner directed by it. u/s 235(c), the Central Government may exercise its power on a report made by the Registrar under Sub-section (6) or under Sub-section (7) read with Sub-section (6) of Section 234. Beyond the Registrar''s report, no further condition is insisted upon for Government to proceed u/s 235(c) and make an order. This is apparently because of the Registrar''s opinion in his report (a) of the unsatisfactory state of affairs of the company or (b) the books and papers or the information or explanation called for not disclosing full and fair statement of any matter to which they purport to relate Section 234(6) or (c) the business of the company is being carried on in fraud of its creditors or of persons dealing with the company or otherwise for a fraudulent or unlawful purpose [Section 234(7)]. The power to appoint inspectors to investigate may also be exercised by Government u/s 235(a) or (b) on application, provided it is made in the case of a company having a share capital by not less than 200 members or of members holding not less than one-tenth of the total voting power therein, or in the case of a company not having a share capital by not less than one-fifth in number of the persons on the company''s register of members. The power u/s 235 is discretionary, though it has of course to be exercised properly, reasonably, bona fide and without bias and subject, in the case of an order u/s 235(a) or (b) to the provisions of Section 236. That section requires that an application u/s 235(a) or (b) should (a) be supported by evidence, (b) showing good reason for requiring investigation. Government may also before making an order u/s 235(a) or (b) require the applicants to give security for a sum not exceeding Rs. 1,000 for payment of costs of the investigation. The power of Government is however compulsorily to be exercised u/s 237(a) on requisition by a special resolution of the company or by an order of Courts Where the case is not covered by provisions of Section 235 or Section 237(a), a residuary discretionary; power is entrusted to Government by Section 237(b) which can be exercised only subject to the condition and within the limits indicated in that provision itself. The condition is that it must form an opinion as a pre-requisite for the exercise of its power to appoint inspectors to investigate and report and the limits for the exercise of the power are that such opinion should be based on the existence of circumstances suggesting one or more of the elements mentioned in Clauses (i) to (iii) of Section 237(b). Clause (i) is related to intention to defraud, fraudulent) or unlawful purpose or oppression of the members in the conduct of the company''s business. More specifically the Clause applies if the business of a company is being conducted (1) with intend to defraud (a) its creditors, (b) members and (c) or any other persons (2) or otherwise (a) for a fradulent or (b) unlawful purpose, (3) or in a manner oppressive of any of its members and (4) or the company was formed for (a) any fraudulent or (b) for unlawful purpose. Clause (ii) is concerned with fraud, misfeasance or other misconduct towards the company or any of its members on the part of the persons concerned in its formation or the management of its affairs. Such fraud or misconduct by such persons should be in connection with its formation or management of its affairs. The last Clause pertains to the denial to the members of the company of the information with respect to its affairs which they may reasonably expect.
The scope and effect of Sections 235 and 237 and the limits of judicial review of orders of Government made thereunder have been recently the subject matter of two decisions of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board (1966) 2 S.C.J. 623 and Rohtas Industries Vs. S.D. Agarwal and Others, They are, however, of no assistance to the Appellant nil its first ground. Section 235(a)(b) have no application to the instant case. There was no application by any member of the Company for investigation. The inspection of the company appears to be but a routine inspection, though it was induced by the anonymous complaints. It was not denied that the Inspector, who made the inspection, had been invested with due authority to make routine inspections. No doubt, an inspection should be purposeful. Here the purpose was provided by the complaints. Even assuming the complaints to be from a member, or members of the company, there is nothing to show that it was by the requisite number of members, or members holding not less than the requisite proportion of the total voting power in the Company. Clause (a) of Section 235 is therefore, not satisfied. The company has, share capital and so, Clause (b) of the section could not be invoked. Nor could the complaints with reference to which inspection was made be regarded as representation to the Registrar by a contributory, or creditor or any other person interested not only because they were anonymous, but they were not addressed to the Registrar but to the Union Ministry. It follows, therefore, that Section 235(c) will have no application either. The two communications of Krishna Rao referred, to earlier, to the Union Finance Minister, came after the inspection bad been carried out, and a report thereon made to the Company Law Board. In any case, the communication did not come within the purview of Section 234(7), read with Section 235(c) or Section 235(a) or (b). In the absence of a special resolution, or a Court''s order as contemplated by Section 237(a), this provision too would have no application. The Union Government was, therefore, competent in the circumstances to exercise its residuary discretionary power u/s 237(b). It is true that inspection under. Section 209 is fundamentally different from investigation u/s 235, or Section 237. The latter of these is a more serious matter, and for that reason restraint and safeguards are provided. But the former is a routine power to inspect books of account, and other books and papers of the company. We do not think that there was anything improper in haying caused the inspection in the light of the complaints and the inspectors, on such inspection, reporting notes of their inspection as the Department had called it. We are thus satisfied that there is no substance in the first ground of the Appellant.
In considering the second ground of attack on the validity of the impugned order, we may first dispose of the contention that Section 237(b)(i) has no application to private companies. The Appellant is undoubtedly a private company as defined by Section 3(iii). But a company means, as seen from Section 3(1), unless the context otherwise requires, a company formed and registered under the Act. The Appellant is such a company. The fascicular of Sections 234 to 237 relating to Registrar''s power to call for information, and the power of the Central Government to appoint Inspectors to investigate and report, seems to cover a private company as well. There is nothing in the context of these provisions to take a contrary view. There may be in existence in a private company, circumstances suggesting one or more of the improprieties, or illegalities mentioned in Section 237(b)(i) to (iii), and we fail to see why the power to investigate into them should not be exercised. There is nothing in the language of Section 237(b) or in the context or its objective, to exclude from it operation a private company.
The real difficulty we have felt in this appeal is, as to the scope of enquiry open to this Court Under Article 226 of the Constitution. The solution, in our view, is to be found from the scheme and structure of the statutory provisions relating to investigation, more particularly Section 237(b), and the objective and the need for investigation, as well as the nature of the power in its impact on companies. Quite obviously, the power of investigation on the face of is a stringent, one, the exercise of which is fraught with serious consequences to the company affected. The exercise of the power therefore, calls for all caution and circumspection. That is the reason why the power has been entrusted to the Central Government, which by its pre-eminent dispensation, is in a position and competent to exercise the power fairly and reasonably, and without bias of any kind. If bias is shown, it will, without question, invalidate an order for investigation u/s 237(b). That ground is always open to the Court to go into. Though in the affidavits filed by Pratap allegations of bias have been made against the order of the Company Law Board, there has been no serious argument and there is no material in support of them. The Board''s order has been canvassed before us on its merits, as if it were in a regular appeal against it. We do not think that this procedure is admissible in a petition for certiorari. Where a power is entrusted by the Legislature to Government or a statutory body, and its exercise is made conditional upon certain requisites being present to enable it to conclude in favour of its exercise, the Court''s interference in certiorari with the actual exercise of the power in a given case, will depend on whether such an exercise is within the limits, or m excess, or in accordance with the terms and conditions of the conferment of the power. Such terms and conditions set the boundaries for judicial review to see whether they are conformed to. The power u/s 237(b)may be exercised by Government if, in its opinion, there are circumstances suggesting one or the other inferences mentioned in Clauses (i) to (iii).
While the power u/s 237(b) is discretionary, it can, like any other statutory discretion, be exercised only according to law and reason without caprice or malice, neither arbitrarily, nor according to private opinion. The particular opinion of the Central Government is the sole factual and legal basis and justification for the exercise of the power to direct investigation. The opinion should be as to (i) existence of circumstances, (ii) which suggest, (iii) one or more of the vices described in any of the Sub-clauses (i) to (iii). Broadly speakings, any opinion is, and has to be, subjective, and will not be open to judicial review both as to its process, formation and logic. But immunity does not always, as we think, extend to the entire span of opinion. Existence of circumstances is an objective factor, the reality of which does not lie in the opinion, or the mental process of reasoning for a conclusion, but external to it. That is why two of the learned Judges in Barium Chemicals Ltd. v. Company Law Board (1966) 2 S.C.J. 623 held the view that the first element of opinion as to existence of circumstances, can legitimately and indeed should be examined when the factual position is in controversy, and this view has been approved and followed in Rohtas Industries Vs. S.D. Agarwal and Others, The Court''s enquiry on that matter, would not only cover the factum of actual circumstances but their relevance, whether they are relevant or irrelevant, or extraneous to the elements in Sub-clauses (i) to (iii). Not only circumstances should exist, but they should be such as they have a nexus between them and those elements, or any of them. If there are no circumstances in existence, or if the circumstances relied on bear no such nexus, there will then be no basis for the opinion. Whether there is the actual nexus, is for final determination, and the second factor suggesting shows that for the purpose of Clause (b) of Section 237 all that is necessary to invoke the power is that the circumstances, prima facie bring forward for consideration one or the other elements in Clauses (i) to (iii). That field, in our view, appears to be a subjective process of a tentative character to open up a fuller probe to find its truth, and such mental process which forms the core of the opinion to be forded by the Central government is not, we feel, open to judicial review as in an appeal or in any other wise or manner, excepting of course, on grounds of bias, malice, caprice, patent unreasonableness or arbitrariness. It has been suggested to us by Mr. Tiruvenkatachari for the Appellant that in this connection the Court''s limit is set by the observation of Lobd Badcliffe in Edwards v. Bairston [1955] 3 All E.R. 55, 59.
The Court is not a second opinion, where is reasonable ground for the first.
There, the House of Lords was on the question of the extent of the power of the appellate Court to review in income tax cases, and the case does not help the approach to the problem we have on hand. While there can be no mystery about the factual existence of circumstances relevant to the elements specified in Section 237(b), bearing in mind the whole object of Section 237(b), namely there being in the opinion of the Government, a prima facie case for further probe to discover facts and circumstances and reach final conclusion, the prima facie view of the Government as to suggesting, is not to be questioned in a Court of Law, except on the grounds we have mentioned, especially when such a view is meant as a conductive to further consideration, and not a finality in itself. We do not forget the responsibility of the Court to act as the sentinel to guard the liberties of not only people who are citizens, but also companies; but the responsibility is within the confines we have limited earlier. The elements in Sub-clauses (i) to (iii) are bound up with the circumstances necessary for forming the opinion and are partly factual and partly inferential. When you look at the relevant circumstances, you know whether they are related or unrelated to the elements in Clauses (i) to (iii), or any of them, and that is the test for the judicial review. As between and from them, the Government form the view tentatively, that the circumstances prima facie bring forward for consideration the existence of one or the other of the vices. That part of the opinion is not to be weighed by the Court as if it were sitting in appeal over it, but must be regarded as beyond judicial review except on the grounds we have mentioned which bear not on the merits of that part of the opinion relating to suggesting, but on broader justice related to malice, bias and the like.
Having regard to the foregoing considerations and having given our careful attention to the relevant parts of the report submitted to the Company Board as a result of the routine inspection directed, we are not persuaded to interfere with the Company Board''s order under attack. We have been taken by Mr. Thiruvenkatachari through the relevant parts of the affidavits and counter-affidavits as well as the several documents and other material on record in an attempt to convince us that the Board''s order was arbitrary. We are of the view that it is neither proper, nor fair for this Court, at this stage, to embark on an assessment of the merits. Such a course may be prejudicial to the parties as the matter has still to be investigated further, and would defeat the purpose of the investigation. That is, perhaps, the reason why Kailasam, J., himself was so cautiously brief in his order. It will suffice to say that having perused the entire record, we are, on the whole, not inclined to interfere with the impugned order. Even this should not be taken as an expression of opinion one way or the other, on the merits of the charges levelled against the Company in that order.
The appeal is dismissed with costs.