The Central Government had under ss. 10E(5) and 642(1) ample power to frame rules authorising the Chairman to distribute the business of the Board. The wide ambit of this rulemaking power is not cut down by the subsequent insertion of sub-s. (4A) in s. 10E.

Case number:1967 AIR 295 1966 SCR 311
Decided on:04/05/1966
Relevant Act/Sections:Companies Act, 1956, ss. 10E, 234, 235, 236 ,237, 237(b) Articles 14 and 19(1) (g) of the Constitution.
    • The Company Law Board was constituted under Section 10E of the Companies Act, 1956, and the Central Government delegated some of its powers under the Act, including those under Section 237, to the Board. The Government also framed rules under Section 642(1) read with Section 10E(5) called the Company Law Board (Procedure) Rules 1964, Rule 3 of which empowered the Chairman of the Board to distribute the business of the Board among himself and other member or members and to specify the cases or classes of cases which were to be considered jointly by the Board.
  • On February 6, 1954, under the power vested in him by Rule 3 the Chairman passed an order specifying the cases that had to be considered jointly by himself and the only other member of the Board and distributing the remaining business between himself and the member. Under this order the business of ordering investigations under Sections 235 and 237 was allotted to himself to be performed by him singly.
  • On May 19, 1965 an order was issued on behalf of the Company Law Board under Section 237(b) of the Companies Act. appointing four inspectors to investigate the affairs of the appellant company, on the ground that the Board was of the opinion that there were circumstances suggesting that the business of the appellant company was being conducted with intent to defraud its creditors, members or any other persons and that the persons concerned in the management of the affairs of the company had in connection therewith been guilty of fraud, misfeasence and other misconduct towards the company and its members.
  • Soon afterwards the appellants filed a petition under Art. 226 of the Constitution for the issue of a writ quashing the order of the Board on the grounds, inter alia, that the order had been issued mala fide that there was no material on which such an order could have been made, etc. The appellant’s petition was dismissed by the High Court hence the present case is filed under the apex court.
    • Whether the High Court had erred in deciding the petition?
    • Has the Chairman placed before the Court to indicate that his action was within the four corners of his own powers?
    • Appellant had challenged the provisions of S. 237(b) on the ground that they are violative of the fundamental rights under Arts. 14 and 19(1)(g) of the Constitution.
    • Whether it was not competent to Mr. Dutt alone to take the decision that an investigation be ordered against the company.
    • The dissenting Opinion Of SARKAR, C.J. and MUDHOLKAR., J. was delivered by MUDHOLKAR, J HIDAYATULLAH. BACHAWAT and SHELAT JJ. delivered separate judgments allowing the Appeal.
  • The opinion must necessarily concern the existence or non-existence of facts suggesting the things mentioned in the several sub-clauses of cl. (b). An examination of the section would show that cl. (b) thereof confers, a discretion upon the Board to appoint an Inspector to investigate the affairs of a company. The words “in the opinion of” govern the words “there are circumstances suggesting” and not the words “may do so”.
  • The words ’circumstances’ and ’suggesting’ cannot be dissociated without making it impossible for the Board to form an ’opinion’ at all. The formation of an opinion must, therefore, be as to whether there are circumstances suggesting the existence of one or more of- the matters in sub-cls. (D to (iii) and not about any-thing else. The opinion must of course not have been arrived at mala fide.
  • To say that the opinion to be formed must be as to the necessity of making an investigation would be making a clear departure from the language in which s. 237(b) is couched. It is only after the, formation of, certain opinion by the Board that the stage for exercising the discretion conferred by the provision is reached. The discretion conferred to order an investigation is administrative and not judicial since its exercise one way or the other does not affect the rights of a company nor does it lead to any serious consequences as, for instance, hampering the business of the company.
  • The scope for judicial review of the action of the Board must, therefore, be strictly limited. The Federal Court in Emperor v. Shibnath Banerjee and approved later by the Privy Council. Quite obviously there is a difference between not forming an opinion at all and forming an opinion upon grounds, which, if a court could go into that question at all, could be regarded as inapt or insufficient or irrelevant. It is not disputed that a court can, not go into the question of the aptness or sufficiency of the grounds ,upon which the subjective satisfaction of an authority is based.
  • The section was enacted to prevent the Management of a company from acting in a manner prejudicial to the interests of the shareholders for whom it was difficult,to get together and take steps for the protection of their interests jointly. It was this difculty of the shareholders-which is a reality-which had led to the enactment of the section. There is no doubt that few shareholders have the means or ability to act against the Management. It would furthermore be difficult for the shareholders to find out the facts leading to the poor financial condition of a company.
  • The Government thought it right to take power to step in where there was reason to suspect that the Management may not have been acting in the interests of the shareholders-who would not be able to take the steps against a powerful body like the Managementand to take steps for protection of such interests. As we have said, the section gives the exploratory power only. Its object is to find out the facts., a suspicion having been entertained that all was not well with the company. The powers are exercised for ascertaining facts and, therefore, before they are finally known, all that is necessary for the exercise of the powers is the opinion ,of the Board that there are circumstances which suggest to it that fraud and other kinds of mismanagement mentioned in sub-cls. (i) to (iii) of cl. (b) of the section may have been committed.
  • If the facts do reasonably suggest any of these things to the Board, the power can be exercised,though another. individual might think that :-the ;facts suggest otherwise It cannot be said that from a huge loss incurred by a company and the working of the company in a dis-organised and un-businesslike way, the only conclusion possible is that it was due to lack of capability. It is reasonably, conceivable that the result had been produced by fraud and other varieties of dishonesty or misfeasance. The order does not amount to a finding of fraud. It is to find out what kind of wrong ,action has led to, the company’s ill-fate that the powers under the sectional given. The enquiry may reveal that.the renovation or other similar kind of malfeasance. It would be destroying the beneficial effective use of the powers given by the section to say that the Board must first show that a fraud can clearly be said to have been committed.
  • It is enough that the facts show that it can be reasonably thought that the company’s unfortunate position might have been caused by fraud and other species of dishonest action. In our opinion, therefore, the argument of Mr. Setalvad about the circumstances being extraneous cannot be accepted. this is an argument that the order was made mala fide.
  1. It is true that a memorandum was presented to Mr. Krishnamachari by four ex-Directors containing grave allegations against the two appellants. But it was not solely on the basis of this memorandum that action was taken by the Board. It is clear from the counter-affidavit of Mr. Dutt and particularly from paragraph 5 thereof that the Board had before it not only two sets of memoranda dated May 30, 1964 and July 9, 1964 respectively from four ex-Directors of the Company alleging serious irregularities and illegalities in the conduct of the affairs of the Company but also other materials.
  1. The Board points out that over a long period beginning from September 1961 the Department had been receiving various complaints in regard to the conduct of the affairs of the Company. One complaint had also been received by the Special Police Establishment and forwarded by it to the Department in November, 1963. The matter was enquired into by the Regional Director of the Board at Madras and he, in his report, sent to the Board in September 1964 suggested an urgent and comprehensive investigation into the affairs of the Company. It is abundantly clear from all this that the investigation cannot be said to have been ordered either at the instance of the four ex-Directors or on the sole basis of the memoranda submitted by them. There is, therefore, no contravention of the provisions of SS. 235 and 236 of the Act. As a corollary to this it would follow that the order was not made mala fide or is otherwise invalid.
  • We would, however, like to add that the company being an artificial legal person cannot, as held by this Court in The State Trading Corporation of India Ltd., v. Commercial Tax Officer Visakhapatnam & Ors.(1),claim the benefit of the provisions of Art. 19(1)(g) though appellant No. 2 Balasubramanian can do so. We agree with our learned brother that the action proposed under S. 237(b) being merely, exploratory in character the fundamental right of Balasubramanian to carry on business is not affected thereby. Since that is so, the question whether the provisions of the aforesaid section are a reasonable restriction on the exercise of the right under Art. 19(1)(g) does not arise for consideration.
  • Bearing in mind the fact that the power conferred by s. 237(b) is merely administrative it is difficult to appreciate how the allocation of business of the Board relating to the exercise of such power can be anything other than a matter of procedure. Strictly speaking the Chairman to whom the business of the Board is allocated does not become a delegate of the Board at all. He acts in the name of the Board and is no more than its agent But even if he is looked upon as a delegate of the Board and, therefore, a sub-delegate vis-a-vis the Central Government he would be as much subject to the control of the Central Government as the Board itself. For sub-s. (6) of s. 10E provides that the Board shall, in the exercise of the powers delegated to it, be subject to the control of the Central Government and the order distributing the business was made with the permission of the Central Government. Bearing in mind that the maxim delegatus non potest delegare sets out what is merely a rule of construction, sub-delegation can be sustained if permitted by an express provision or by necessary implication.
  • Where, as here, what is sub-delegated is an administrative power and control over its exercise is retained by the nominee of Parliament, that is, here the Central Government, the power to make a delegation may be inferred. We are, therefore, of the view that the order made by the Chairman on behalf of the Board is not invalid. To sum up, then, our conclusions may be stated thus:- The discretion conferred on the Central Government by s. 237(b) to order an investigation and delegated by it to the Company Law Board is administrative, that it could be validly exercised by the Chairman of the Board by an order made in pursuance of a rule enacted by the Central Government under S. 642(1) read with s. 10E(5), that the exercise of the power does not violate any fundamental right of the company, that the opinion to be formed under S. 237(b) is subjective and that if the grounds are disclosed by the Board the Court can examine them for considering whether they are relevant.

Though the order could successfully be challenged if it were made mala fide, it has not been shown to have been so made. The attack on the order thus fails and the appeal is dismissed with costs.

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