V.L.S. Finance Ltd. vs Union of India (UOI) and Others

S. Ravindra Bhat, J.—In the present case, the writ petitioner approaches this court under Article 226 of the Constitution of India, for a direction to the Central Government to institute proceedings u/s 401 of the Companies Act, 1956.

The relevant facts of the case are as follows. The petitioner is a non-banking financial company incorporated under the Companies Act, 1956 (hereafter referred to as "the Act") and is engaged, inter alia, in the business of leasing, portfolio investment in equity shares, issue management, portfolio management, and financing of projects, equipments, consultancy services, etc. The respondents are also companies registered under the Act and are involved in the hospitality industry. The petitioner is a shareholder in the second respondent-company. Alleging oppression and mismanagement the petitioner filed petitions under Sections 397 and 398 of the Act before the Company Law Board (hereafter "the CLB") in 1998, which was dismissed. Meanwhile, in 1999, the Central Government ordered inspection of the accounts of the respondent u/s 209A of the Act. Being aggrieved by the order of the Company Law Board, the petitioners then appealed to the High Court of Delhi in 2005. Pending this appeal they file the present writ seeking directions.

The petitioner alleges that the reports of an inspection into the affairs of the respondent were not pursued vigorously. Also, the petitioner alleges that a petition u/s 397/398 was, in fact prepared against the second respondent by the Central Government for presentation to the Company Law Board and that the said petition, inexplicably disappeared. The petitioner lodged a complaint with the Delhi police in relation to the disappearance and further pursued the matter with this court. The petitioner avers that the Central Government has improperly not exercised its discretion in accordance with law by not proceeding u/s 401 and was influenced by circumstances extraneous to the Act. It is also averred that since violations of the Act were detected in the inspection report, the respondents should take action by initiating the proceedings. Further, they also submit that this court by order dated August 25, 1995, had observed that the petitioner could approach the appropriate court by way of a writ petition to compel the Government to take necessary action against the other respondents.

The first respondent vehemently denies that they have acted in a capricious manner. It submits that an inspection was undertaken in order to investigate into the affairs of the company and follow up actions are being taken. It alleges that the petition u/s 397/398 read with Section 408 of the Act filed by the petitioner was dismissed by the Company Law Board and that order was carried in appeal to this court. The first respondent contends that it was not impleaded in the petition filed before the Company Law Board and that it had moved an application as an intervener in those proceedings. Further, the first respondent also filed an application u/s 237(b) seeking investigation of the matter before the Company Law Board on the basis of the report filed u/s 209A and the said petition is pending. It alleges that on receipt of the relevant orders, the appointment of an inspector would be considered and all steps would be taken to ensure that public interest is protected and offenders brought to justice.

The first respondent contends that by virtue of Section 242(1) of the Act, the Central Government need undertake action only after they obtain the necessary legal advice and that steps are being taken in this regard. The relevant provision is extracted below:

Section 242(1). If, from any report made u/s 241, it appears to the Central Government that any person in relation to the company or in relation to any other body corporate whose affairs have been investigated by virtue of Section 239 been guilty of any offence for which he is criminally liable, the Central Government may after taking such legal advice as it think fit, prosecute such person for the offence; and it shall be the duty of all officers and other employees and agents of the company, or body corporate, as the case may be (other than the accused in the proceedings), to give the Central Government all assistance in connection with the prosecution which they are reasonably able to give.

Respondents Nos. 2 to 4 (hereafter "private respondents") submit that the present case in an instance of vexatious litigation and forum shopping. They aver about existence of financial disputes between them and the petitioner. They allege that the present round of litigation is nothing but an effort by the petitioner to coerce them. They also allege that the Company Law Board, in a petition under Sections 397 and 398 of the Act, decided the matter in their favour and gave the petitioner an option to quit the second respondent company by selling its shares to the promoters but petitioner preferred an appeal against that order. The matter has now been referred back to Company Law Board.

It is alleged that when the petitioner-company became sure that it would be unable to obtain a favourable decision from the Company Law Board, it launched a massive criminal campaign against the promoters for answering respondent and got registered an FIR No. 90 of 2000 against the promoters for answering respondent on exactly the same grounds as that of the petition before the Company Law Board. In continuation of its tirade, they allege, that the petitioner further wrote complaints such as on September 27, 2001, January 7, 2002 and March 26, 2002 to the Secretary, Department of Company Affairs, Secretary, Department of Law and Director of Investigation, Department of Company Affairs, on the basis of the confidential documents, i.e., the appraisal report prepared by the Income Tax Department, to initiate action against them under the Companies Act. Further, the petitioner on February 28, 2002, lodged FIRs, under Sections 384, 406, 409, 421, 422, 468, 467, 471 and 120(b) with the police station at Defence Colony, alleging that the private respondents have threatened them. However, they admit that the Registrar of Companies launched various prosecutions against the directors/promoters of the respondent companies and that an application for inspection is also pending before the Company Law Board. They aver that it is the prerogative of the Department to initiate action or not.

Mr. Aman Lekhi, learned senior Counsel reiterated the position of the petitioner, reflected in its pleadings. It was urged that the Central Government is undoubtedly invested with discretionary power to initiate or refrain from taking, action against companies not complying with provisions of the Act. Such power is coupled with the duty to act in public interest, and upon relevant considerations. The omission of the Central Government to take steps to prosecute proceedings under Sections 397 and 401 of the Act amounts to abuse of its discretion for extraneous factors and oblique motives.

Learned Counsel relied upon the decision of the Supreme Court, reported as Comptroller and Auditor-general of India, Gian Prakash, New Delhi and Another Vs. K.S. Jagannathan and Another, , to say that the High Court, exercising jurisdiction under Article 226 has the power to issue a direction where the Government or a public authority fails to exercise or has wrongly exercised the discretion conferred upon it by a statute, a rule or a policy decision of the Government or has exercised such discretion mala fide or on irrelevant considerations or by ignoring the relevant considerations and materials or in such a manner as to frustrate the object of conferring such discretion. The courts can give directions to compel the performance in a proper and lawful manner of the discretion conferred upon the government or a public authority, and in a proper case, in order to prevent injustice resulting to the concerned parties, the court may itself pass an order or give directions. Counsel also relied upon the judgment of the Supreme Court, reported as S. Ramanathan Vs. Union of India and Others, for the submission that exercise of statutory power comprehends the duty to exercise requirements of the law; if the authority invested with the power omits to use it, the court, under Article 226, can correct such impropriety by issuing appropriate directions.

The petition was resisted by Counsel for the private respondents, who relied upon the pleadings in the counter affidavit. He also submitted that the present petition is a vexatious litigation and that the Central Government has already taken steps against individual directors of the company for infraction of provisions of the Companies Act, besides seeking directions from the Company Law Board. Therefore, improper exercise of discretion by omitting or failing to take any action did not arise.

The relief claimed, as is evident from the above discussion, is for a direction to the first respondent use its power u/s 401 to file a proceeding against the contesting respondents. The entire basis of the petition is alleged dereliction of duty and wilful omission to effectuate the power. Significantly, it has not been disputed that an application u/s 237 for investigation was already pending before the Company Law Board. This was not averred or disclosed by the petitioners; they have, instead alleged that the Central Government acted in an unreasonable manner. Aside from the allegation about preparation of a draft petition u/s 401 and the alleged deliberate abandonment of the option to file it, the allegations have not been substantiated by any other circumstances.

Sections 237 and 242 give wide discretion to the Government to pursue the necessary remedies and, in fact, it has reasonably exercised this discretion by moving an application before the Company Law Board for investigation. The petitioner could definitely have resorted to efficacious remedies before the same forum instead of agitating before the High Court for two years.

Not only has the petitioner been unable to prove the Government took irrelevant considerations into account but also has deliberately sought to mislead the court by submitting that this court by order dated August 25, 2005, observed that it could approach the appropriate court by way of a writ petition to compel the Government to take necessary action against the other respondents.

Long ago, the Supreme Court, in Smt. S.R. Venkataraman Vs. Union of India (UOI) and Another, spelt out what constitutes malice in law, or legal, mala fides, in the context of abuse of discretionary power, thus (page 494):

...if a discretionary power has been exercised for an unauthorised purpose, it is generally immaterial whether its repository was acting in good faith or in bad faith. As was stated by Lord Goddard, C.J. in Pilling v. Abergele Urban District Council [1950] 1 KB 636 : [1950] 1 All ER 76, where a duty to determine a question is conferred on an authority which state their reasons for the decision, and the reasons which they state show that they have taken into account matters which they ought not to have taken into account, or that they have failed to take matters into account which they ought to have taken into account, the court to which an appeal lies can and ought to adjudicate on the matter.

The principle which is applicable in such cases has thus been stated by Lord Esher, M.R. in Queen on the Prosecution of Richard Westbrook v. The Vestry of St. Pancras [1890] 24 QBD 371:

If people who have to exercise a public duty by exercising their discretion take into account matters which the courts consider not to be proper for the guidance of their discretion, then in the eye of the law they have not exercised their discretion.

This view has been followed in Sadler v. Sheffield Corporation [1924] 1 Ch. D 483.

In view of the multifarious litigation pending between the petitioner and the contesting respondents, and the fact that the Central Government has already moved the Company Law Board for action, though not u/s 401, I find no merit in the contention that its decision not to do so is a wilful omission to exercise discretion which it was lawfully bound to, in the circumstances of this case.

In the light of the above findings, the writ petition has to fail. The petitioner has indulged in speculative litigation, by seeking to use the jurisdiction of this court under Article 226, when plainly, there was absolutely no occasion for it to seek recourse to it, as the facts do not justify entertainment of such proceeding. Besides, it did not disclose several litigations pending inter se with the contesting respondent. In the circumstances, I am of the opinion that this is an appropriate case where the petitioner should be saddled with costs. Accordingly, the petitioner shall pay costs of these proceedings, quantified at Rs. 30,000; they shall be deposited with the Prime Minister''s Relief Fund, within four weeks, and compliance shall be indicated by way of an affidavit, within five weeks. The petition is accordingly dismissed, with the direction to pay costs, in the above terms.