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PETITIONER:

ROHTAS INDUSTRIES LTD.

Vs.

RESPONDENT:

S.D. AGARWAL & ANR.

DATE OF JUDGMENT:

16/12/1968

BENCH:

HEGDE, K.S.

BENCH:

HEGDE, K.S.

SIKRI, S.M.

BACHAWAT, R.S.

CITATION:

1969 AIR 707 1969 SCR (3) 108

1969 SCC (1) 325

CITATOR INFO :

D 1970 SC 564 (26,228,229,231)

R 1970 SC1789 (14)

RF 1972 SC1816 (18)

RF 1974 SC2249 (10)

D 1976 SC1913 (18)

R 1978 SC 597 (86,222)

D 1982 SC 149 (1245)

C 1984 SC1271 (26)

RF 1987 SC1109 (26)

ACT:

Indian Companies Act (1 of 1956), s. 237 (b)(i) and (ii)-

Circumstances suggesting fraud-Existence of-If condition

precedent to action under section.

HEADNOTE:

On May 20, 1960, Albion Plywoods Ltd. resolved at a general

meeting to convert its preference shares into ordinary

shares. M/s. Sahu Jains were its managing agents. Some

time before, in April 1960, New Central Jute Mills Co. Ltd.

had sold the preference shares of Albion Plywoods which it

was holding. One S. P. Jain, against whom proceedings in

criminal courts were pending for acts of misfeasance and

malfeasance in relation to other companies, was controlling

both the New Central Jute Mills Co. and Sahu Jains. With

respect to this sale there was a complaint to the Department

of Company Affairs, Government of India, that the management

of New Central Jute Mills knew that the preference shares

would be converted into ordinary shares and so the sale was

effected at an undervalue so that, on conversion into

ordinary. shares they would fetch a higher price, and that

the transaction was effected for the benefit of the managing

agents, their friends and brokers, at the expense of the

shareholders. In the course of investigation into this

charge, it was discovered that the appellant-company had

also 'sold 3000 preference shares of Albion Plywoods which

it was holding, on May 6, 1960. The appellant-company was

also controlled by S. P. Jain. On April 11, 1963 the

Central Government passed an order under s. 237(b) (i) and

(ii) of the Companies Act, 1956, appointing an inspector to

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investigate into the affairs of the appellant-company and to

report thereon to the Central Government, on the basis that

the sale of preference shares was a fraudulent transaction

considered in the background of the association of S. P.

Jain with the appellant-company and other companies. The

appellant,company filed a writ petition challenging the

order. The High Court dismissed it on the ground that the

opinion of the Central Government was not open to judicial

review and that the declaration of the Government that it

formed the required opinion was conclusive.

In appeal to this Court, it was contended that under the

section, an inspector may be appointed only if, in the

opinion of the Government there are circumstances suggesting

that the business of the company was being conducted with

intent to defraud its creditors. members or other persons,

or for a fraudulent or unlawful purpose, or in a manner

oppressive of any of its members, or that the company was

formed for a fraudulent or unlawful purpose, or that persons

concerned in its formation ,or management have, in

connection therewith, been guilty of fraud, misfeasance or

other misconduct towards the company or its members; that

is, though the opinion of the Government is subjective, the

existence of the circumstances is a condition precedent to

the formation of the opinion and therefore, the Court was

not precluded from going behind the recitals of the

existence of such circumstances in the order, but could

determine, whether the circumstances did in fact exist, and

whether the Central Government took extraneous matters into

consideration.

HELD (per Sikri and Hegde, JJ.) : Sections 235 to 237 are

allied sections and form a scheme for investigation into the

affairs of a company.

109

The investigation under s. 237(b) is of a fact finding

nature which does not bind anybody. The Government is not

required to act on it and the company has to be called upon

to have its say in the matter. But, s. 237 takes its colour

from the other two sections and those sections show that

such an investigation is a very serious matter and should

not be ordered except on good grounds. The appointment of

an inspector is likely to receive publicity as a result of

which the company's reputation and prospects may suffer.

The power to appoint an inspector is an inroad on the rights

of the company to carry on its business and would violate

the fundamental right of its shareholders under Art.

19(1)(f), unless the power is so interpreted as to be a

reasonable restriction in the interest of general public,

and not as an arbitrary power. It would be a reasonable

restriction if circumstances suggesting that the company's

business was being conducted as laid down in s. 237(b) (i)

or that the persons mentioned in s. 237(b) (ii) were guilty

of -fraud or misfeasance or other misconduct towards the

company or its members, exist as a condition precedent for

the Government two form the required opinion, and, if the

existence of those circumstances is challenged, the Court is

entitled to examine whether those circumstances existed when

the order was made. Further, the Department of the Central

Government which deals with companies is a body, expert in

company law matters, and the standard prescribed under s.

237(b) is not the standard required of an ordinary citizen

but that of an expert who would take into consideration only

relevant material. [ 1 17 F; 11 8 G-H; 1 19 B, E; 128 H; 129

A-E]

Observations of Hidayatullah and Shelat, JJ. in Barium

Chemicals v. Company Law Board, [1966] Supp. S.C.R. 311,

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followed.

Padfield v. Minister of Agriculture, [1968] 1 All E.R. 694,

Commissioner of Customs & Excise v. Cure and Deeley Ltd.

[1962] 1 Q. B. 340, Roncarelli v. Duplessis,. [1959] S.C.R.

(Canada) 121 and Read v. Smith, [1959] New Zealand Law

Reports, 996, applied.

Susannah Sharp v. Wakefield, [1891] A.C. 173, 179 and

Nakkuda Ali v. M. F. De S. Jayaratne, [1951] A.C. 66, 77,

referred to.

State of Madras v. C. P. Sarathy & Anr. [1953] S.C.R. 334,

Joseph Kuruvilla Vellukunnel v. The Reserve Bank of India &

Ors. [1962] 3 supp. S.C.R. 632, Hubli Electricity Co. Ltd.-

v. Province of Bombay, L.R. Vol. LXXVI I.A. 1948-49 p. 57,

Robinson v. Minister of Town and Country Planning, [1947] 1

K.B. p. 702 and Point of Avr Collieries Ltd. v.Lloyd George,

[1943] 2 All E.R. p. 546, not applicable.

In the present case, the only material on the basis of which

the impugned order was made was the transaction of sale of

preference shares of Albion Plywoods. But at the time when

the Government made the impugned order it did not know the

market quotations for the shares, and in fact, the market

price showed that no fraud was involved in the sale of the

shares. No Reasonable person, much less an expert body,

could have come to the conclusion that any fraud was

involved. if the Government had any suspicion about the

transaction it should have probed further into the matter

since the order could not be justified on the material

before it. The fact that one of the leading directors of

the appellant-company was a suspect in the eye of the

Government because of his antecedents was not a relevant

circumstance and should not have been taken into consi-

deration by the Government which was entrusted with the

responsibility of forming a bona fide opinion on the basis

of relevant material. [129 F-H; 130 A-D]

(Per Bachawat, J.) : The object of investigation under s.

237(b) is to find out whether in fact any fraud has been

committed. The section con-

110

fers an administrative and not a judicial power. is

discertionary and no appeal is provided against an order.

Such discretionary power must be exercised honestly and not

capriciously or arbitrarily or for Ulterior purposes. The

section must be interpreted in the light of its own language

and subject matter and not by reference to other sections or

other statutes. So interpreted, the condition precedent for

making the order under the section is the opinion of the

Central Government that there are circumstances suggesting

fraud and not the existence of the circumstances. If the

opinion of an administrative agency is the condition

precedent to the exercise of the power the relevant matter

is the opinion of the agency and not the grounds on which

the opinion is founded. The authority must form the opinion

honestly and after applying its mind to the relevant

materials before it. If it is established that there were

no materials at all upon which the authority could form the

requisite opinion, the Court may infer that the authority

passed the order without applying its mind, that is, the

requisite opinion is lacking and therefore the condition

precedent to the exercise of the power under the section is

not fulfilled. The opinion is displaced as a relevant

opinion if it could not be formed by any sensible person on

the material before him, the reason being, that the Court

may then infer that the authority either did not honestly

form the opinion or that in forming it, it did not apply its

mind. Within these narrow limits the opinion of the Central

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Government is not conclusive and can be challenged in a

Court, but the Court has no power to review the facts as an

appellate body nor can it substitute its opinion for that of

the Government. Had the opinion been conclusive it would

have been open to challenge as violative of Arts. 14 and 19

of the Constitution. [131 E-H; 132 A-F; 133 E]

Corporation of Calcutta v. Calcutta Tramways Co. Ltd. [1964]

5 S.C.R. 25, Joseph Kuruville Vellukunnel v. Reserve Bank of

India, [1962] Supp. 3 S.C.R. 632, Hubli Electricity Co. v.

Province of Bombay, L.R. 76 I.A. 57, Ross-Clunis v.

Papadopoullos & Ors., [1958] 2 All E.R. 23, State of

Maharashtra v. B. K. Takkamore, [1967] 2 S.C.R. 583, 585,

588, Province of Bombay v. K. S. Advani, [1950] S.C.R. 621,

Nakkuda. Ali v. M. E. De, S. Jayaratne, [1951] A.C. 66, 77,

State of Madras v. C. P. Sarathy and Anr., [1953] S.C.R.

334, Swadeshi Cotton Mills Co. Ltd. v. State of U.P. & Ors.,

[1962] 1 S.C.R. 422 and State of Bombay v. K. P. Krishnan,&

Ors. [1961]1S.C.R 227, referred.

The learned Judge's own observations in Barium Chemicals v.

Company Law Board, [1966] Supp. S.C.R. 311, 343, explained.

In the present case, no complaint with regard to the

impropriety of the sale of preference shares of Albion

Plywoods was made to the Central Government. There was no

material suggesting that the purchasers were benamidars of

M/s. Sahu Jains or their friends. The market price of the

,shares of Albion Plywoods on or about the date of sale was

not known to the Central Government when the order was made

and does not show that the transaction was fraudulent. The

charge that the sale was fraudulent was not communicated to

the appellant-company nor were they asked to give their

explanation on the subject. The Government did not seem to

rely on the transaction of sale of preference shares as

suggesting fraud. Therefore, there was no material before

the Government on which it could form the opinion that there

were circumstances suggesting fraud, and hence the opinion

was formed without applying its mind to the materials before

it and was in excess of its powers under s. 237(b). [135 E,

G; 136 H; 137 A-B, D]

JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2274 to

2276 of 1966.

111

Appeals by special leave from the judgments and orders,

dated January 20, July 4, and July 5, 1966 of the Patna High

Court in C.W.J.C., Nos. 18 of 1966, 910 of 1965 and 397 of

1966 respectively.

M. C. Setalvad, M. C. Chagla, R. K. Garg, S. C. Agarwal

and S. Chakravarti, for the appellant (in all the

appeals).

Niren De, Attorney-General, V. C. Mahajan and S. P. Nayar,

for the respondents (in all the appeals).

The Judgment of S. M. SIKRI and K. S. HEGDE, JJ. was

delivered by HEGDE, J. R. S. BACHAWAT, J. delivered a

separate Opinion.

Hegde J. The only question that arises for decision in these

appeals by special leave, is whether the order made by the

Central Government in No. 2(4)-CL.1/63, Government of India,

Ministry of Commerce and Industry, Department of Company Law

Administration on April 11, 1963 is liable to be struck down

as not having been made in accordance with law.

The appellant in these appeals is a company incorporated

under the Indian Companies Act, 1913 having its registered

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office at Dalmia Nagar, Shahbad District, Bihar State. It

is manufacturing paper, cement, sugar, vanaspati and other

articles. Its authorised capital is rupees 15 crores and

the paid up capital little more than six crores. It was

incorporated in the year 1933.

The impugned order reads

"No. 2(4)-CL.1/63

Government of India,

Ministry of Commerce and Industry,

Department of Company Law Administration.

ORDER

Whereas the Central Government is of the

opinion that there are circumstances

suggesting that the business of Rohtas

Industries Limited a company having its

registered office at Dalmianagar, Bihar

(hereinafter referred to as the said company)

is being conducted with intent to defraud its

creditors, members or other persons and the

persons concerned in the management of its

affairs have in connection therewith been

guilty of fraud, misfeasance, other misconduct

towards the said company or its members,

AND WHEREAS the Central Government consider it

desirable that an Inspector should be

appointed to investigate the affairs of the

said Company and to report thereon.

112

NOW, THEREFORE, in exercise of the several

powers conferred by sub-clauses (i) and (ii)

of clause (b) of Section 237 of the Companies

Act, 1956 (Act 1 of 1956) the Central

Government hereby appoint Shri S. Prakash

Chopra of Messrs. S. P. Chopra & Co.

Chartered Accountants, 31, Connaught Place,

New Delhi as Inspector to investigate the

affairs of the said company for the period

1-4-1958 to date and should the Inspector so

consider it necessary -also for the period

prior to 1-4-1958 and to report thereon to the

Central Government pointing out inter alia

irregularities and contravention in respect of

the provisions of the Companies Act, 1956 or

of the Indian Companies Act, 1913 or of any

other law for the time being in force and

person or persons who are responsible for such

irregularities and contravention.

(2) The Inspector shall complete the

investigation and submit six copies of his

report to the Central Government not later

than four months from the date of issue of

this order unless time in that behalf is

extended by the Central Government.

3. A separate order will issue with regard

to the remuneration and other incidental

expenses of the Inspector.

The Eleventh day of April, 1963.

By order and in the name of the

President of India

Sd/- D.S. Dang Deputy Secretary to the

Government of India"

The time granted to the Inspector has been repeatedly ex-

tended. For one reason or the other the investigation

directed is still in its initial stage. The various

extensions given for completing the investigation are also

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challenged in some of the appeals. But that contention was

not debated before us. Hence it is not necessary to

consider that question.

The contention of the appellant is that the Central Govern-

ment had no material before it from which it could have come

to the conclusion that the business of the appellant company

is being conducted with intent to defraud its creditors,

members or other persons or the persons concerned in the

management of its affairs have in connection therewith been

guilty of fraud, misfeasance or other misconduct towards the

said company or its members.

113

In response to the rule issued by the Patna High Court Shri

Rabindra Chandra Dutt, the then Secretary to the Government

of India, Ministry of Finance, Department of Company Affairs

and Insurance and Chairman, Company Law Board, New Delhi

filed an affidavit in opposition on behalf of the

respondents. Therein various objections to the writ

petition were taken but the pleas raised by him in paragraph

5(a) and (b) of his affidavit are the only pleas relevant

for our present purpose. This is what is stated therein :

"I say that the true facts are -as under-

(a) Shri S. P. Jain together with his

friends, relations and associates is

principally in charge of the management of the

petitioner company. Over a long period,

several complaints had been received by the

Deptt. as to the misconduct of the said Shri

S. P. Jain towards companies under his control

and management. Some of these were referred

to and inquired into by a commission of

Inquiry headed by Mr. Justice Vivian Bose of

the Supreme Court of India, which in its

report, dated 15-6-62 made adverse findings

and observations against Shri S. P. Jain.

Shri Jain is being prosecuted in the Court

District Magistrate, Delhi under sections 120B

read with sections 409, 465, 467 and 477 of

the Indian Penal Code in regard to his

misconduct in the management of what are known

as the Dalmia Jain group of companies, and

most of the material upon the basis of which

this prosecution was launched was available to

the Central Government on 11-4-63. Shri Jain

is also being prosecuted in Calcutta for

misconduct in the management of Messrs. New

Central Jute Mills Co., Ltd., a company under

the same management as the petitioner

, on the

basis of an F.I.R. lodged by the Department

with the Special Judge, Police Establishment

just before the 1 1 th April 1963, Shri Jain

is also being proceeded against before the

Companies Tribunal under sections 388B and 398

for misconduct in managing the affairs of M/s.

Bennett Coleman & Co., Ltd. and details as to

Shri Jain's misconduct were with the Central

Government as on 11th April, 1963.

(b) Complaints had also been received by the

Department before 11th April, 1963

specifically as to the misconduct on the part

of the manage-

114

ment of the petitioner company in the conduct

of its affairs."

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The High Court dismissed the writ petition holding that the

,opinion formed by the Central Government under s. 237(b) of

the Companies' Act 1956 (hereinafter to be called as the

Act) is not open to judicial review; the impugned order

declares that the Central Government had formed the required

opinion and the same is conclusive. That conclusion of the

High Court is ,challenged in this Court.

When this appeal came up for hearing on 17-9-1968 this Court

directed the respondents to file a further affidavit placing

,on record the complaints mentioned in paragraph 5(b) of the

aforementioned affidavit of Shri Robindra Chandra Dutt. The

said affidavit was directed to be filed within a fortnight

from that date and the appellants were permitted to file a

reply affidavit within a week thereafter.

In pursuance of the above order Shri Sisir Kumar Datta

Secretary to the Government of India, Ministry of Industrial

Development and Company Affairs. Department of Company

Affairs New Delhi filed his affidavit on October 4, 1968.

Along with that affidavit he produced into Court three

complaints received by the Government which are marked as

Annexures 'A' to 'C'. Shri Datta does not claim to have any

personal knowledge of the facts of this case. Therefore the

only additional material that is placed before us are the

three annexures marked as Annexures 'A' to 'C'. Shri Niren

De, learned Attorney stated before us that the Union of

India had placed before the Court all the relevant material

it possessed bearing on the subject.

Annexure 'A' is said to have been submitted in June, 1960.

Most of the allegations contained therein are of vague

character. It was conceded by the learned Attorney that

those allegations could not have been the basis for making

the impugned order. 'Therefore it is not necessary to refer

to them in extension One of the concrete allegations made

therein-on which allegation alone some half hearted reliance

was placed at the hearing-is that though the appellant

company had a debenture capital of Rs. 48,50,000, on 31-12-

39, Shreeram Harjimal, a father concern of Dalmia Jain Group

had pledged in various Banks debentures of the appellant-

company of the value of Rs. 1,07,47,000 and-raised a loan of

nearly rupees one crore. According to the complaint this

must have been done by forging some documents. The

complaint further stated that the appellant-company has

facilitated that fraud by paying interest on the entire

loans borrowed. The above allegation has been denied by the

appellant in the reply affidavit filed on its behalf. Mr.

Attorney conceded that the impugned order -could not have

been made on the basis of this alle-

115

gation as it directed an inquiry into the company's affairs

primarily for the period subsequent to 1-4-1958 and the

allegation in question relates to transactions that took

place in about the year 1939 but at the same time he

contended that the allegation in question afforded the

necessary background in assessing the other allegations.

Some of the allegations contained in that complaint such as

the levy of Rs. 50 lacs fine on S. P. Jain should have been

known to the Government to be incorrect in view of the

various proceedings that had taken place earlier which were

within the knowledge of the Government.

In Annexure 'B' there are no specific allegations. The

learned Attorney did not rely on any of the allegations

contained therein as having formed the basis for issuing the

impugned order.

Annexure 'C' is a complaint relating to the working of New

Central Jute Mills Co., Ltd. it makes no reference to the

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appellant-company. We were told that the New Central Jute

Mills Co. Ltd. is a sister concern of the appellant-company.

In paragraph 4 of that complaint following allegations were

made :

"The investments of the Company in Albion Ply-

Woods Ltd. and their variations by the

Company's Managing Agents appear to have been

done to benefit the Managing Agents, their

friends and brokers, at the expense of the

shareholders. It appears that the preference

shares in this company were sold at the market

rate of Rs. 100 each when these could be

converted into ordinary shares of Rs. 10 each

which were then quoting at Rs. 15 in the stock

market. This and various other acts of

deliberate commissions and omissions require a

thorough investigation so that shareholders in

general may have a feeling of security in the

company."

It appears that Albion Plywoods Ltd. at the relevant time

had a subscribed capital of rupees ten lacs made up of Rs.

50,000 ordinary shares of the face value of Rs. 10 each and

Rs. 5,000 preference shares of the face value of Rs. 100

each. Though the preference shares were not by right

convertible into ordinary shares, it appears in about the

end of April or beginning of May, 1960, the Albion Plywoods

Ltd. gave notice of a special resolution to permit the

conversion of the preference shares into ordinary shares and

the said resolution was passed by the General Meeting on May

20, 1960. On May 6, 1960 the appellant-company which held

3,000 preference shares of the Albion Plywoods Ltd. sold the

same to M/s. Bagla & Co. for the face value. Annexure 'C'

was forwarded to the Regional Director, Company Law

Administration, Calcutta for inquiry and report. At this

stage it may be noted that the inquiry in question was

directed against the New Central Jute Mills Co., Ltd. and

not against the appel-

116

lant company. The Regional Director submitted his report on

November 1 0, 1961. In his report he opined that the

transaction complained of is of a doubtful character and

therefore further inquiry is desirable. Thereafter on

December 2, 1961 the UnderSecretary to the Government of

India wrote to the Regional Director asking for some further

information. One of the points on which information was

called for was whether Sahu Jain's Co's (other than New

Central Jute Mills Co. Ltd.) who were holding 3,000 shares

of Albion Plywoods Ltd. had also transferred their shares to

Bagla & Co./Podar and Sons and to give full details thereof.

The Regional Director was also asked to report whether the

preference shares of the Albion Plywoods Ltd. carried any

voting rights before conversion. In that letter it was

further observed :

"In this regard it is suggested that discreet

enquiries may be made to find out the names of

the partners of Bagla and Company and Poddar

Sons and also whether, the said brokers were

actively associated with the Sahu Jains. If

considered necessary, the help of the Officer

of the Stock Exchange Division of the E. A.

Department recently posted at Calcutta may be

sought in this regard."

On January 29, 1962, the Regional Director replied to that

letter. In his reply he stated :

"I have been able to gather the following

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information regarding the 3,000 preference

shares of Rs. 100 each of Albion Plywoods Ltd.

The preference shares were acquired by Rohtas

Industries Ltd. (A Sahu Jain Company) on

allotment by the Albion Plywood Ltd. of such

shares on 15th June, 1951. These 3,000 prefe-

rence shares were sold to M/s Bagla & Co.,

on 6th May, 1960 at par for Rs. 3 lacs. It

would appear that these shares were sold

before 20th May, 1960 the date on which the

preference shares were converted into ordinary

shares."

The Regional Director in his letter of 10th November, 1961,

had given the market quotations for the ordinary shares of

Albion Plywoods Ltd. on some of the dates in May, 1960.

According to him those quotations were gathered from 'Indian

Finance'. Evidently as he was inquiring into the complaint

made against the New Central Jute Mills Co. Ltd. he did not

mention the market quotation for the shares in question

either on May 6, 1960 or immediately before that date.

During the hearing of these appeals an affidavit has been

filed on behalf of the appellant stating that the market

quotation of the ordinary share in the Albion Plywoods Ltd.

on May 6, 1960 or immediately before that date was Rs. 1 1.

117

Alongwith that affidavit, the relevant copy of the Indian

Finance was produced.' It was not disputed before us that

the market quotation for the ordinary shares of Albion

Plywoods Ltd. on or immediately before May 6, 1960 was Rs.

11 per share. At this stage it may be mentioned that though

the Under Secretary to the Government required the Regional

Director to find out the names of the partners of Bagla &

Co. and whether, the brokers who dealt with the shares were

actively associated with Sahu Jain, it does not appear that

the Regional Director supplied those information.

Admittedly there was no material before the Government when

it issued the impugned order from which it could have

reasonably drawn the conclusion that the transaction in

favour of Bagla & Co. was either a nominal transaction or

was made with a view to profit the Directors of the

appellant-company or their relations. According to Mr.

Attorney the only circumstance on the basis of which the

Government passed the impugned order was the sale of 3,000

preference shares of Albion Plywoods Ltd. held by the

appellant-company though, according to him, the Government

viewed that circumstance in the background of the various

complaints received by it against Mr. S. P. Jain who was at

that time one of the prominent Directors of the appellant-

company, New Central Jute Mills Co. Ltd. and Albion Plywoods

Ltd., as well as the report made by the Vivian Bose

Commission which inquired into the affairs of some of the

companies with which Mr. S. P. Jain was connected.

Admittedly Vivian Bose Commission did not inquire into the

affairs of the appellant-company nor does its report contain

anything about the working of that company nor was there any

complaint against the appellant-company excepting that made

in Annexure 'A'.

On the basis of the above facts we have now to see whether

the Government was competent to pass the impugned order.

Sections 235 to 237 of the Act are allied sections and they

form a scheme. They deal with the investigation of the

affairs of the company. To find out the true scope of S.

237 (b), it is necessary to take into consideration the

provisions contained in S. 235 as well as 236. They read :

"235. Investigation of affairs of company on

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application by members or report by

Registrar.-The Central Government may appoint

one or more competent persons as inspectors to

investigate the affairs of any company and to

report thereon in such manner as the Central

Government may direct,-

(a) in the case of a company having a share

capital, on the application either of not less

than two hundred members or of members holding

not less than one-tenth of the total voting

power therein;

118

(2)in the case of a company not having a share

capital, on the application of not less than

one-fifth in number of the persons on the

company's register of members;

(c) in the case of any company, on a report

by the Registrar under sub-section (6), or

sub-section (7) read with sub-section (6), of

section 234.

236. Application by members to be supported

by evidence and power to call for security-An

application by members of a company under

clause (a) or (b) of section 235 shall be

supported by such evidence as the Central

Government may require for the purpose of

showing that the applicants have good reason

for requiring the investigation; and the

Central Government may, before appointing an

inspector, require the applicants to give

security, for such amount not exceeding one

thousand rupees as it may think fit, for

payment of the costs of the investigation."

The power conferred on the Central Government under S. 235

as well as under s. 237(b) is a discretionary power whereas

the Central Government is bound to appoint one or more

competent persons as Inspectors to investigate the affairs

of a company and to report thereon in such manner as the

Central Government may direct if the company by special

resolution or the Court by order declares that the affairs

of the company ought to be investigated by an Inspector

appointed by the Central Government [237 (a) (i) (ii) ]. It

may be noted that before the Central Government can take

action under s. 235 certain pre-conditions have to be

satisfied. In the case of an application by members of the

company under cl. (a) or (b) of S. 235, the same will have

to be supported by such evidence as the Central Government

may require for the purpose of showing that the applicants

have good reasons for requiring the investigation, and the

Central Government may, before appointing an Inspector,

require the applicant to give security for such amount not

exceeding Rs. 1,000 as it may think fit for payment of the

costs of the investigation. From the provisions contained

in ss. 235 and 236 it is clear that the legislature consid-

ered that investigation into the affairs of a company is a

very serious matter and it should not be ordered except on

good grounds. It is true that the investigation under s.

237(b) is of a fact finding nature. The report submitted by

the Inspector does not bind anybody. The Government is not

required to act on the basis of that report, the company has

to be called upon to have its say in the matter but yet the

risk-it may be a grave one-is that the appointment of an

Inspector is likely to receive much press publicity as a

result of which the reputation and prospects of the com-

119

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pany may be adversely affected. It should not therefore be

ordered except on satisfactory grounds.

Before taking action under S. 237(b)(i) and (ii), the Cent-

ral Government has to form an opinion that there are circum-

stances suggesting 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 member or that the

company was formed for any fraudulent or unlawful purpose or

that the persons concerned in the formation or the

management of its affairs have in connection therewith been

guilty of fraud, misfeasance or other misconduct towards the

company or towards any of its members.

From the facts placed before us, it is clear that the

Government had not bestowed sufficient attention to the

material before it before passing the impugned order. It

seems to have been oppressed by the opinion that it had

formed about Shri S. P. Jain. From the arguments advanced

by Mr. Attorney, it is clear that but for the association of

Mr. S. P. Jain with the appellant-company, the investigation

in question, in all probabilities would not have been

ordered. Hence, it is clear that in making the impugned

order irrelevant considerations have played an important

part.

The power under ss. 235 to 237 has been conferred on the

Central Government on the faith that it will be exercised in

a reasonable manner. The department of the Central

Government which deals with companies is presumed to be an

expert body in company law matters. Therefore the standard

that is prescribed under S. 237(b) is not the standard

required of an ordinary citizen but that of an expert. The

learned Attorney did not dispute the position that if we

come to the conclusion that no reasonable authority would

have passed the impugned order on the material before it,

then the same is liable to be struck down. This position is

also clear from the decision of this Court in Barium

Chemicals and Anr. v. Company Law Board and Anr.(1).

It was urged by Mr. Setalvad, learned Counsel for the appel-

lant that cl. (b) of S. 237 prescribes two requirements i.e.

(1) the requisite opinion of the Central Government and (2)

the existence of circumstances suggesting that the company's

business was being conducted as laid down in sub-cl. (1) or

that the persons mentioned in sub-cl. (2) were guilty of

fraud, misfeasance or misconduct towards the company or any

of its members. According to him though the opinion to be

formed by the Central Government is subjective, the

existence of circumstances set out in cl. (b) is a condition

precedent to the formation of such opinion and therefore the

fact that the impugned order contains recitals of

(1) [1966] Supp. S.C.R.311

120

the existence of those circumstances, does not preclude the

court from going behind those recitals and determining

whether they did in fact exist and further whether the

Central Government in making that order had taken into

consideration any extraneous consideration. But according

to the learned Attorney the power conferred on the Central

Government under cl. (b) of s. 237 is a discretionary power

and the opinion formed, if in fact an opinion as required by

that section has been formed, as well as the basis on which

that opinion has been formed are not open to judicial

review. In other words according to the learned Attorney no

part of s. 237(b) is open to judicial review, the matter is

exclusively within the discretion of the Central Government

and the statement that the Central Government had formed the

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required opinion is conclusive of the matter.

Courts both in this country as well as in other Commonwealth

countries had occasion to consider the scope of provisions

similar to s. 237 (b). Judicial dicta found in some of

those decisions are difficult of reconciliation.

The decision of this Court in Barium Chemicals' case(1)

which considered the scope of s. 237(b) illustrates that

difficulty In that case Hidayatullah, J. (our present Chief

Justice) and Shelat, J. came to the conclusion that though

the power under s. 237(b) is a discretionary power the first

requirement for its exercise is the honest formation of an

opinion that the investigation is necessary and the further

requirement is that "there are circumstances suggesting" the

inference set out in the section; an action not based on

circumstances suggesting an inference of the enumerated kind

will not be valid; the formation of the opinion is

subjective but the existence of the circumstances relevant

to the inference as the sine qua non for action must be

demonstratable; if their existence is questioned, it has to

be proved at least prima facie; it is not sufficient to

assert that those circumstances exist and give no clue to

what they are, because the circumstances must be such -as to

lead to conclusions of certain definiteness; the conclusions

must relate to an intent to defraud, a fraudulent or

unlawful purpose, fraud or misconduct. In other words they

held that although the formation of opinion by the Central

Government is a purely subjective process and such an

opinion cannot be challenged in a court on the ground of

propriety, reasonableness. or sufficiency, the authority

concerned is nevertheless required to arrive at such an

opinion from circumstances suggesting the conclusion set out

in sub-cls. (i), (ii) and (iii) of S. 237(b) and the

expression "circumstances suggesting" cannot support the

construction that even the existence of circumstances is a

matter of subjective opinion. Shelat, J. further observed

that it is hard to contemplate that the Legislature could

have left to the subjective

(1) [1966] Supp. S.C.R. 311

121

process both the formation of opinion and also the existence

of circumstances on which it is to be founded; it is also

not reasonable to say that the clause permitted the

Authority to say that it has formed the opinion on

circumstances which in its opinion exist and which in its

opinion suggest an intent to defraud or a fraudulent or

unlawful purpose.

On the other hand Sarkar, C.J. and Mudholkar, J. held that

the power conferred on the Central Government under S.

237(b) is a discretionary power and no facet of that power

is open to judicial review. Our brother Bachawat, J., the

other learned Judge in that Bench did not express any

opinion on this aspect of the case. Under these

circumstances it has become necessary for us to sort out the

requirements of s. 237(b) and to see which of the two

contradictory conclusions reached in Barium Chemicals'

case(1) is in our judgment, is according to law. But before

proceeding to analyse s. 237(b) we should like to refer to

certain decisions cited at the bar bearing on the question

under consideration.

We shall first take up the decisions read to us by the

learned Attorney.

In State of Madras v. C. P. Sarathy and Another(2) this

Court was called upon to consider the scope of S. 10(1) of

the Industrial Disputes Act, 1947. There the question for

decision was whether the opinion formed by the State

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Government that there existed an industrial dispute is open

to judicial review. While dealing with that question this

Court observed

"But it must be remembered that in making a

reference under S. 10(1) the Government is

doing an administrative act and the fact that

it has to form ail opinion as to the factual

existence of an industrial dispute as a

preliminary step to the discharge of its

function does not make it any the less

administrative in character. The Court,

cannot, therefore, canvass the order of

reference closely to see if there was any

material before the Government to support its

conclusion, as if it was a judicial or quasi-

judicial determination no doubt, it Will be

open to a party seeking to impugn the

resulting award to show that what was referred

by the Government was not an industrial

dispute within the meaning of the Act, and

that, therefore, the Tribunal had no

jurisdiction to make the award. But, if the

dispute was an industrial dispute as defined

in the Act, its factual existence and the

expediency of making a reference in the

circumstances of a particular case are matters

entirely for the Government to decide

upon,

(1) [1966] Supp. S.C.R. 31 1.

7Sup.CI/69-9

(2) [1953] S.C.R. 334

122

and it will not be competent for the Court to

hold the reference bad and quash the

proceedings for want of jurisdiction merely

because there was, in its opinion, no material

before the Government on which it could have

come to an affirmative conclusion on those

matters."

This interpretation of s. 10(1) is based on the language of

that provision as well as the purpose for which the power in

question was given and the effect of a reference. That

decision cannot be considered as an authority for the

proposition that whenever a provision of law confers certain

power on an authority on its forming a certain opinion on

the basis of certain facts the courts are precluded from

examining whether the relevant facts on the basis of which

the opinion is said to have been formed had in fact existed.

Reliance was next placed on the decision of this Court in

Joseph Kuruvilla Vellukunnel v. The Reserve Bank of India

and Ors.(1) wherein this Court was called upon to examine

the vires -of s. 3 8 ( 1 ) and 3 (b) (iii) of the Banking

Companies Act, 1949. Kapur, and Shah, JJ. held that the

provisions in question are ultra vires the Constitution as

the power conferred on the Reserve Bank is an arbitrary,

power whereas the majority consisting of Sinha, C.J.,

Hidayatullah and Mudholkar, JJ. upheld the validity of the

provisions on the ground that the power conferred on the

Reserve Bank is a reasonable restraint taking into

consideration the interests of the public and the position

occupied by the Reserve Bank in the financial system of this

country We do not think that this decision bears on the

point under consideration.

In Hubli Electricity Company Ltd. v. Province of Bombay(2)

the Judicial Committee came to the conclusion that the

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opinion to be formed by the Provincial Government under s.

4(1) of the Indian Electricity Act, 1910 is a subjective

opinion and the same ,cannot be adjudged by applying

objective tests. The relevant portion of section 4(1) reads

:

"The Provincial Government may, if in its

opinion the public interest so requires,

revoke a licence in any of the following

cases, namely --

(a) where the licensee in the opinion of the

Provincial Government makes wilful and

unreasonably prolonged default in doing

anything required of him by or under this

Act. . . . "

Dealing with the scope of that provision their

Lordships observed

"Their Lordships are unable to see that there

is any-

thing in the language of the sub-section or in

the subject

(1) [1962] Supp.3,S.C.R.632.

(2) L.R. (1948-49) 76. I.A. 57.

matter to which it relates on which to found

the suggestion that the opinion of the

Government is to be subject to objective

tests. In terms the relevant matter is the

opinion of the government--not the grounds on

which the opinion is based. The language

leaves no room for the relevance of a judicial

examination as to the sufficiency of the

grounds on which the government acted in

forming an opinion. Further the question on

which the opinion of the government is

relevant is not whether a default has been

wilful and unreasonably prolonged but whether

there has been a wilful and unreasonably pro-

longed default. On that point the opinion is

the determining matter, and-if it is not for

good cause displaced as a relevant opinion-it

is conclusive."

It may be remembered that therein the, Judicial Committee

was considering a pre-constitutional provision which was not

subject to the mandate of Art. 1 9 (1) (g). Further their

Lordships were careful enough to observe :

"that they are unable to see that there is

anything in the language of the sub-section or

in the subject matter to which it relates on

which to found the suggestion that the opinion

of the government is to be subject to objec-

tive tests."

In other words in their Lordship's opinion the subject

matter of a legislation has an important bearing in the

interpretation of a provision. We may also add that s. 4(1)

of the Electricity Act 1910 stood by itself and in finding

out its scope no assistance could have been taken from any

other provision in that Act.

In Rabinson v. Minister of Town and Country Planning(1) the

declaratory order made by the Minister that he was satisfied

that the area comprised in the order should be 'laid out

afresh and re-developed as a whole' was held not open to

judicial review. The order in question to an extent

depended on questions of policy. It is not open for courts

to decide questions of policy.

In Point of Ayr Collieries Ltd. v. Lloyd George(2) the Court

of -Appeal upheld the contention that - the order made by

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the Minister of Fuel and Power under the defence (General)

Regulations No. 55 (4) assuming the management of an

undertaking was not open to judicial review. In arriving at

the decision it is clear that the court was influenced by

the decision of the House of Lords in Liversidge v.

Anderson(,') and Greene v. Home Secretary (4 ) which

considered the validity of detentions during war time. The

decisions cannot serve as real guide for interpreting the

provision of law with which we are concerned.

(1) [1947] 1 K.B. 702. (3) [1941] 3 All E.R. 338.

(2) [1943] 2 All E.R. 546. (4) [1941] 3 All E.R. 388.

124

We shall now refer to the decisions relied on by the appel-

lant.

As long back as 1891 the House of Lords was called upon to

consider the scope of some of the provisions of the

Licensing Act 1872 which gave discretion to the Magistrates

in granting certain licenses. The question for decision was

as to the nature of the discretion granted. Lord Halsbury

L. C. speaking for the House observed, in Susannah Sharp v.

Wakefield and Ors. (1).

" 'discretion' means when it is said that

something is to be done within the discretion

of the authorities that that something is to

be done according to the rules of reason and

justice, not according to private opinion :

Rooke's case; according to law, and not

humour. It is to be, not arbitrary, vague and

fanciful, but legal and regular."

In Nakkuda Ali v. M. F. De S. Jayaratna(2) the Judicial Com-

mittee in interpreting the words "where the Controller has

reasonable grounds to believe that any dealer is unfit to be

allowed to continue as a dealer" found in Regulation 62 of

the Defence (Control of Textiles) Regulations, 1945 observed

:

"After all, words such as these are commonly

found when a legislature or law-making

authority confers powers on a minister or

official. However read, they must be intended

to serve in some sense as a condition limiting

the exercise of an otherwise arbitrary power.

But if the question whether the condition has

been satisfied is to be conclusively decided

by the man who wields the power the value of

the intended restraint is in effect nothing.

No doubt he must not exercise the power in bad

faith : but the field in which this kind of

question arises is such that the reservation

for the case of bad faith is hardly more than

a formality. Their Lordships therefore treat

the words in reg. 62, 'where the Controller

has reasonable grounds to believe that any

dealer is unfit to be allowed to continue as a

dealer' as imposing a condition that there

must in fact exist such reasonable grounds,

known to the Controller before he can validly

exercise the power of cancellation."

The decision of the House of Lords in Padfield and Ors. v.

Minister of Agriculture, Fisheries and Food and Ors.(3) is

of considerable importance. Therein the material facts are

these :

The appellants in that appeal, members of the south east

regional committee of the Milk Marketing Board, made a com-

(3) [1968] 1 All E.R. 694.

125

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plaint to the Minister of Agriculture, Fisheries and Food,

pursuant to S. 19(3) of the Agricultural Marketing Act,

1958, asking that the complaint be referred to the committee

of investigation established under that enactment. The

complaint was that the board's terms and prices for the sale

of milk to the board did not take fully into account

variations between producers and the cost of bringing milk

to a liquid market. In effect the complaint was that the

price differential worked unfairly against the producers in

the popular south east region, where milk was more valuable,

the cost of transport was less and the price of land was

higher. There had been many previous requests to the board,

but these had failed to get the board, in which the south

east producers were in a minority, to do anything about the

matter. The Minister declined to refer the-matter to the

committee. By letters of May 1, 1964 and March 23, 1965, he

gave reasons which included that (in effect) his main duty

had been to decide the suitability of the complaint for such

investigation but that it was one which raised wide issues

and which he did not consider suitable for such investi-

gation, as it could be settled through arrangements

available to producers and the board within the milk

marketing scheme; that he had unfettered discretion, and

that, if the complaint were upheld by the committee, he

might be expected to make a statutory order to give effect

to the committee's recommendations. Section 19(3) (b) of

the Agricultural Marketing Act, 1958 read

"A committee of investigation shall be charged

with the duty, if the Minister in any case so

directs, of considering, and reporting to the

Minister, on any report made by the consumers'

committee and any complaint made to the

Minister as to the operation of any scheme

which, in the opinion of the Minister, could

not be considered by a consumers' committee

under the last foregoing subsection."

The appeal was allowed by the House of Lords (Lord Morris of

Borth-Y-Gest dissenting). Lord Reid and Lord Pearce held

that where a statute conferring a discretion on a Minister

to exercise or not to exercise a power did not expressly

limit or define the extent of his discretion and did not

require him to give reasons for declining to exercise the

power, his discretion might nevertheless be limited to the

extent that it must not be so used, whether by reason of

misconstruction of the statute or other reason, as to

frustrate the object of the statute which conferred it.

Lord Hodson and Lord Upjohn held that although the Minister

had full or unfettered discretion under s. 19(3) of the

Agricultural Marketing Act, 1958, he was bound to exercise

it lawfully viz. not to misdirect himself in law, nor to

take into account irrelevant matters, nor to omit relevant

matters from consideration.

126

In the course of his speech Lord Hodson made

the following observations :

"If the Minister has a complete discretion

under the Act of 1958, as in my opinion, he

has, the only question remaining is whether he

has exercised it lawfully. It is on this

issue that much difference of Judicial opinion

has emerged, although there is no divergence

of opinion on the relevant law. As Lord

Denning M.R. said citing Lord Greene M.R. in

Associated Provincial Picture Houses Ltd. v.

Wednesbury Corpn. (1).

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" a person entrusted with a discretion must

direct himself properly in law. He must call

his own attention to the matters which he is

bound to consider. He must exclude from his

consideration matters which are irrelevant to

the -matter that he has to consider'

Lord Pearce in his speech observed :

"If all the prima facie reasons seem to point

in favour of his taking a certain course to

carry out the intentions of Parliament in

respect of a power which it has given him in

that regard, and he gives no reason whatever

for taking a contrary course, the court may

infer that he has no good reasons and that he

is not using the power given by Parliament to

carry out its intentions. In the present case

however the Minister has given reasons which

show that he was not exercising his discretion

in accordance with the intentions of the Act

of 1958.

In the present case it is clear that

Parliament attached considerable importance to

the independent committee of investigation as

a means to censure that injustices were not

caused by the operation of a compulsory

scheme."

Lord Upjohn observed

"My Lords, on the basic principles of law to

be applied there was no real difference of

opinion, the great question being how they

should be applied to this case. The Minister

in exercising his powers and duties conferred

on him by statute can only be controlled by a

prerogative order which will only issue if he

acts unlawfully. Unlawful behaviour by the

Minister may be stated with sufficient

accuracy for the purposes of the present

appeal (and here I adopt the classification of

Lord Parker C.J. in the divisional court): (a)

by an

(1) [1947] 2, All E.R. 682.

127

outright refusal to consider the relevant

matter; or (b) by misdirecting himself in

point of law, or (c) by taking into account

some wholly irrelevant or extraneous con-

sideration, or (d) by wholly omitting to take

into account a relevant consideration. There

is ample authority for these propositions

which were not challenged in argument. In

practice they merge into one another and

ultimately it becomes a question whether for

one reason or another the Minister has acted

unlawfully in the sense of misdirecting

himself in law, that is, not merely in respect

of some point of law but by failing to observe

the other headings which I have mentioned."

In Commissioners of Customs and Excise v. Cure and Deeley

Ltd.(1) the power given to the Commissioners under S. 33(1)

of the Finance Act, 1940 "to make regulations providing for

any matter for which provision appears to them to be

necessary for the purpose of giving effect to the provisions

of this Part of the Act and of enabling them to discharge

their functions thereunder . . . . . . " was held not to

make that authority the sole judge of what its powers were

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as well as the sole judge of the way in which it could

exercise such powers as it might have. Sachs, J. who spoke

for the Court observed the legal position thus :

"In the first place I reject the view that

the words appear to them to be necessary' when

used in a statute conferring powers on a

competent authority, necessarily make that

authority the sole judge of what are its

powers as well as the sole judge of the way in

which it can exercise such powers as it may

have. It is axiomatic that, to follow the

words used by Lord Radcliffe in the Canadian

case 'the paramount rule remains that every

statute is to be expounded according to its

manifest or expressed intention'. It is no

less axiomatic that the application of that

rule may result in phrases identical in

wording or in substance receiving quite

different interpretations according to the

tenor of the legislation under consideration.

As an apt illustration of such a result it is

not necessary to go further than Liversidge v.

Anderson(2) and Nakkuda Ali v. Jayaratne(3)

which cases the words 'reasonable cause to

believe' and 'reasonable grounds to believe'

received quite different interpretations.

To my mind a court is bound before reaching a

decision on the question whether a regulation

is intra vires to examine the nature, objects,

and scheme of the

(1) [1962] 1 Q.B. 340.

(3) [1951] A.C.66.

(2) [1942] A.C. 206

128

.lm15

piece of legislation as a whole and in the light of that

examination to consider exactly what is the area over which

powers art given by the section under which the competent

authority is purporting to act."

In Roncarelli v. Duplessis(1), while dealing with the

discretionary power of the Quebec Liquor Commission to

cancel a liquor licence this is what Rand, J. observed :

"A decision to deny or cancel such a privilege lies within

the 'discretion' of the Commission; but that means that

decision is to be based upon a weighing of considerations

pertinent to the object of the administration.

In public regulation of this sort there is no such thing as

absolute and untrammeled 'discretion' that is that action

can be taken on any ground or for any reason that can be

suggested to mind of the administrator; no legislative Act

can, without express language, be taken to contemplate an

unlimited arbitrary power exercisable for any purpose,

however capricious or irrelevant, regardless of the nature

or purpose of the statute. Fraud and corruption in the

Commission may not be mentioned in such statutes but they

are always implied as exceptions. 'Discretion' necessarily

implies good faith in discharging public duty; there is al-

ways a perspective within which a statute is intended to

operate; and any clear departure from its lines or objects

is just as objectionable as fraud or corruption. Could an

applicant be refused a permit because he had been born in

another province, or because of the colour of his hair? The

ordinary language of the legislature cannot be so

distorted."

In particular we would like to emphasize the observation

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that "there is always a perspective within which a statute

is intended to operate".

In Read v. Smith (2) it was held that the Governor-General's

power under the-Education Act to make such regulations as he

"thinks necessary to secure the due administration" of the

Act has been held invalidly exercised in so far as his

opinion as to the necessity for such regulation was not

reasonably tenable.

Coming back to s. 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 ss. 235 and 236. In finding out the

legislative intent we

(1) [1959] S.C.R. (Canada Law Reports) 121.

(2) [1959] New Zealand Law Reports 996.

129

cannot ignore the requirements of those sections. ln

interpreting S. 237(b) we cannot ignore the adverse effect

of the investigation on the company. Finally we must also

remember that the section in question is an inroad on the

powers of the company to carry on its trade or business and

thereby an infraction of the fundamental right guaranteed to

its shareholders under Art. 1 9 (1 ) (g) and its

validity cannot be upheld unless it is considered that the

power in question is a reasonable restriction in the

interest of the general public. In fact the vires of

that provision was upheld by majority of the Judges

constituting the Bench in Barium Chemicals' case(1)

principally on the ground that the power conferred on the

Central Government is not an arbitrary power and the same

has to be exercised in accordance with the restraints im-

posed by law. For the reasons stated earlier we agree with

the conclusion reached by Hidayatullah, and Shelat, JJ. in

Barium Chemicals'(1) case that the existence of

circumstances suggesting that the company's business was

being conducted as laid down in sub-cl.(1) or the persons

mentioned in sub-cl.(2) were guilty of fraud or misfeasance

or other misconduct towards the company or towards any of

its members is a condition precedent for the Government to

form the required opinion and if the existence of those

conditions is challenged, the courts are entitled to examine

whether those circumstances were existing when the order was

made. In other words, the existence of the circumstances in

question are open to judicial review though the opinion

formed by the Government is not amenable to review by the

courts. As held earlier the required circumstances did not

exist in this case.

Next question is whether any reasonable authority much less

expert body like the Central Government could have

reasonably made the impugned order on the basis of the

material before it. Admittedly the only relevant material

on the basis of which the impugned order can be said to have

been made is the transaction of sale of preference shares of

Albion Plywoods Ltd. At the time when the Government made

the impugned order, it did not know the market quotation for

the ordinary share of that company as on the date of the

sale of those shares or immediately before that date. They

did not care to find out that information. Hence there was

no material before them showing that they were sold for

inadequate consideration. If as is now proved that the

market price of those shares on or about May 6, 1960 was

only Rs. 11 per share then the transaction in question

could not have afforded any basis for forming the opinion

required by S. 237(b). If the market price of an ordinary

share of that company on or about May 6, 1960 was only Rs. 1

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1 it was quite reasonable for the Directors to conclude that

the price of the ordinary shares is likely to go down in

view of the company's proposal to put on the mar-

(1) [1966] Supp. S.C.R. 311.

130

ket another 50,000 shares as a result of the conversion of

the preference shares into ordinary shares. We do not think

that any reasonable person much less any expert body like

the Government, on the material before it, could have jumped

to the conclusion that there was any fraud involved in the

sale of the shares in question. If the Government had any

suspicion about that transaction it should have probed into

the matter further before directing any investigation. We

are convinced that the precipitate, action taken by the

Government was not called for nor could be justified-on the

basis of the material before it. The opinion formed by the

Government was a wholly irrational opinion. The fact that

one of the leading Directors of the appellant company was a

suspect in the eye of the Government because of his

antecedents, assuming without deciding, that the allegations

against him are true, was not a relevant circumstance. That

circumstance should not have been allowed to cloud the

opinion of the Government. The Government is charged with

the responsibility to form a bona fide opinion on the basis

of relevant material. The opinion formed in this case

cannot be held to have been formed in accordance with law.

In the result we allow these appeals and set aside the

impugned order. The respondents shall pay the costs of the

appellant both in this Court as well as in the High Court

(Hearing fee one set).

Bachawat, J. The Central Government is authorized to appoint

an inspector to investigate the affairs of a company under

s. 235 clauses (a) and (b) of the Companies Act, 1956 on the

applications of its members, under s. 235 clause (a) on the

report of the Registrar, under s. 237 clause (a) sub-clause

(i) if required by a special resolution of the company,

under s. 237 clause (a) sub-clause (ii) if directed by the

court and under s. 237 clause (b) if the Government is of

the opinion that there -are circumstances suggesting

malpractices in relation to the company's affairs. The

investigation is mandatory under s. 235 clause (a) if it is

required by the company's special resolution, see R. v.

Board of Trade Exp. St. Martin Preserving Co. Ltd.(2) or if

the Court so directs. The Court has a discretion to direct

the investigation on being satisfied that the affairs of the

company should be investigated, Re Miles Aircrafts Ltd.,

(No. 2)(2). The investigation is a fact finding inquiry and

its object is to ascertain whether in fact malpractices have

been committed in relation to the company's affairs, see

Raja Narayanlal Bansilal v. Manak Phiroz Mistry & Anr.(3).

On a consideration of the inspector's report, the Government

can take appropriate action against the delinquents under

ss. 242, 243 and 244.

[1955] 1 Q.B,693,515. (2) [1948] W.N.178.

(3) [1961] 1 S.C.R.417,430-6.

131

Section 237(b) provides that the Central Government may

appoint one or more competent persons as inspectors to

investigate the affairs of the company and to report thereon

in such manner as the Central Government may direct, "if, in

the opinion of the Central Government, there are

circumstances suggesting-

(i) 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,

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or in a manner oppressive of any of its members or that the

company was formed for any fraudulent or unlawful purpose;

(ii) that persons concerned in the formation of the company

or the management of its affairs have in connection

therewith been guilty of fraud, misfeasance or other

misconduct towards the company or towards any of its member;

or

(iii) that the members of the company have not been

given, all the information with respect to its affairs which

they might reasonably expect, including information relating

to the calculation of the commission payable to a managing

or other director, the managing agent, the secretaries and

treasurers or the manager,. of the company."

The conditions for the exercise of the statutory power are

clearly stated in s. 237(b). It is well to bear in mind,

firstly, that: v. 237(b) confers an administrative and not a

judicial power; secondly, that the power is discretionary;

thirdly, that the object of the investigation is to find out

whether in fact fraud etc., have been committed by persons

in relation to the company's affairs; fourthly, that the

condition for making the order is the opinion;, of the

Central Government that there are circumstances suggesting

fraud etc., and lastly that there is no appeal from such

opinion to the Court.

The law recognises certain well recognised principles within

which the discretionary power under s. 237(b) must be exer-

cised. There must be a real exercise of the discretion.

The authority must be exercised honestly and not for corrupt

or ulterior purposes. The authority must form the requisite

opinion honestly and after applying its mind to the relevant

materials before it. In exercising the discretion the

authority must have regard only to circumstances suggesting

one or more of the matters specified in sub-clauses (i),

(ii) and (iii). It must act reasonably and not capriciously

or arbitrarily. It will be an absurd exercise of

discretion, if, for example, the authority forms the re-

quisite opinion on the ground that the director in charge of

the company is a member of a particular community. Within

these narrow limits the opinion is not conclusive and can be

challenged in a court of law. Had s. 237(b) made the

opinion, conclusive, it might be open to challenge as

violative of Arts. 14 and 19 of'

132

the Constitution, see : Corporation of Calcutta v. Calcutta

Tramways Co. Ltd.,(1) distinguishing Joseph Kuruville

Veilukunnel v. The Reserve Bank of India(2). Section 237(b)

is not violative ,of Arts. 14 and 19.

If it is established that there were no materials upon which

the authority could form the requisite opinion the court may

infer that the authority did not apply its mind to the

relevant facts. The requisite opinion is then lacking and

the condition precedent to the exercise of the power under

s. 23 7 (b) is not fulfilled. On this ground I interfered

with the order under s. 237 (b) in Barium Chemicals v.

Company Law Board(3).

Let me recall the words of s. 237(b) : "If, in the opinion

of the Central Government, there are circumstances

suggesting...... The relevant matter is "the opinion of the

Central Government". The condition precedent to the

exercise of power under S. 237(b) is the opinion of the

Government and not the existence of the circumstances

suggesting one or more of the specified matters. To hold

that the factual existence of such matters is a condition

precedent to the exercise of the power is to re-write the

section. Section 237(b) must be interpreted in the light of

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its own language and subject-matter. We miss its real

import if we begin by referring to the construction put by

other judges on other statutes perhaps similar but not the

same. The decisions are useful when they lay down

principles of interpretation or give the meaning of the

words which have become terms of art.

The decided cases show that normally, if the opinion of an

administrative agency is the condition precedent to the

exercise ,of the power, the relevant matter is the opinion

of the agency and -not the grounds on which the opinion is

founded. In Hubli Electricity Company v. Province of

Bombay(4) the Privy Council had occasion to construe S. 4(1)

(a) of the Indian Electricity Act (TX of 1910) which read :

"The Provincial Government may, if in its opinion the public

interest so requires, revoke a licence in any of the

following cases, namely,

(a) where the licensee in the opinion of the Provincial

Government makes wilful and unreasonably prolonged default

in doing anything required of him by or under this Act."

The Government acting under S. 4(1)(a) revoked the licence.

The licensee filed a suit for a declaration that the order

was invalid. The Government pleaded that it had formed the

opinion as mentioned in S. 4 (1 ) (a), and contended that on

the true construction of the Act the Court was not entitled

to go behind its

(1) [1964] 5S.C.R.25.

(3) [1966] 'Supp. S.C.R. 311, 343.

(2) [1962] Supp. 3 S.C.R. 632.

(4) L.R.76 I.A. 57.

133

opinion. The appellant submitted that the opinion referred

to in s. 4(1) (a) was not the subjective opinion of the

Government but an opinion subject to objective, tests.

Lord Uthwatt said .-

"Their Lordships now turn to the question of

construction of s. 4, sub-s. 1 (a). Their

Lordships are unable to see that there is

anything in the language of the sub-section or

in the subject-matter to which it relates on

which to found the suggestion that the opinion

of the Government is to be subject to

objective tests. In terms the relevant matter

is the opinion of the Government not the

grounds on which the opinion is based. The

language leaves no -room for the relevance of

a judicial examination as to the sufficiency

of the grounds on which the Government acted

in forming an opinion. Further, the question

on which the opinion of the Government is

relevant is not whether a default has been

wilful and unreasonably prolonged but whether

there has been a wilful -and unreasonably

prolonged default. On that point the opinion

is the determining matter, -and-if it is not

for good cause displaced as a relevant

opinion-it is conclusive."

The opinion is displaced as a relevant opinion if it could

not be formed by any sensible person on the material before

him. The reason is that the Court may then infer that the

authority either did not honestly form the opinion or that

in forming it, it did not apply its mind to the relevant

facts. In Ross-Clunis V. Papadopoullos & Ors.(1) the

commissioner of Limassol imposed a fine on the Greek Cypriot

inhabitants in the area after holding an inquiry under

regulation 5 of the Cyprus Emergency Powers (Collective

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Punishment) Regulations, 1955 which provided that "in

holding inquiries under these regulations, the commissioner

shall satisfy himself that the inhabitants of the said area

are given adequate opportunity of understanding the subject-

matter of the inquiry and making representations thereon."

The Privy Council upheld the commissioner's order and set

aside the order, of certiorari quashing it. With regard to

the contention of the commissioner that the only duty cast

on him was to satisfy himself of those facts, that the test

was a subjective one and that in the absence of bad faith

his statement that he was so satisfied was a complete answer

to the argument that he had failed to comply with reg. 5.

Lord Morton said :-"Their Lordships feel the force of this

argument, but they think that if it could be shown there

were no grounds on which the appellant could be satisfied, a

court might infer either that he did not honestly form that

view or that, in forming it, he could not have applied his

mind to the

(1) [1958] 2 All E.R. 23.

134

relevant facts. In the present case, however, there were

ample grounds on which -the appellant could feel 'satisfied'

of the matters mentioned in reg. 5 (2)" see -also : State of

Maharashtra v. B. K.Takkamore(1).

The other decisions cited at the bar are not helpful on the

construction of s. 237(b). In construing statutory

provisions of this description, the actual words used and

their subject-matter are of the utmost importance. Thus if

the statute provides that "if in the opinion of the

Provincial Government it is necessary or expedient to do so

the Provincial Government may, by order in writing

requisition any land for any public purpose", the existence

of the public purpose but not its necessity or expediency is

justiciable, see : Province of Bombay v. K. S. Advani(2).

The reason is that the factual existence of the public

purpose is by the language of the section a condition

precedent of the requisition; and now in view of Art. 31(2)

of the Constitution, this is a constitutional requirement

irrespective of the language of the section. Where the

statute authorises the executive action "if AB has

reasonable grounds to believe" the certain circumstance or

thing, it means what it says. AB must in fact have

reasonable grounds for believing a circumstance or a thing,

see : Nakkuda Ali v. M. F. De S. Jawaratne(3). But in an

emergency legislation, such a phrase was construed to impose

only the condition that AB honestly thought he had

reasonable grounds for belief, see : Liversidge v. Sir John

Anderson(4) but such a construction need not invariably be

given, see King Emperor v. Vimlabai(5). In Carltona Ltd. v.

Commissioner of Works(6) the Court held -that an emergency

legislation authorising requisition of premises, "if it

appears to that authority to be necessary or expedient so to

do in the interest of public safety, etc.", the court could

not investigate the grounds or reasonableness of the

decision in the absence of an allegation of bad faith.

These decisions on emergency legislation stand on a peculiar

footing. 'Me courts are not inclined to fetter executive

action when the country is being raided by the enemy. They

show that the subject-matter of the statute has a material

bearing on its construction. To give another example, the

courts are not inclined to interfere with orders of

reference of industrial disputes, see : State of Madras v.

C. p. Sarathy and another(7). Swadeshi Cotton Mills Co. Ltd.

v. State of U.P. & Ors. (8) but even such orders -are not

immune from judicial review, see State of Bombay v. K. P.

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Krishnan & Ors.

(1) [1967] 2S.C.R.583,585,588.(2) [1950] S.C.R.621.

(3) [1951] A.C.66,77. (4) [1942] A.C. 206.

(5) L.R. 73. I.A. 144. (6) [1943] All E.R. 560.

(7) [1953] S.C.R. 334, 346-47.(8) [1962] 1 S.C.R. 422.

(9) [1961] 1 S.C.R. 227.

135

Let us now turn to the facts of the present case. The

Central Government passed the impugned order under S. 237

(b) on April 11, 1963. The order recited

"Whereas the Central Government is of the opinion that there

are circumstances suggesting that the business of Rohtas

Industries Limited,, a company having its registered office

at Dalmianagar, Bihar, (hereinafter referred to as the said

company) is being conducted with intent to defraud its

creditors, members or other persons and the persons

concerned in the management of its affairs have in

connection therewith been guilty of fraud, misfeasance, or

other misconduct towards the said company or its members."

The order then stated that in exercise of the powers

conferred by s. 237 (b) sub-clauses (i) and (ii) of the

Companies Act, 1956 the Central Government appointed Shri S.

Prakash Chopra as inspector to investigate the affairs of

the said company for the period April 1, 1958 up to date and

should he consider it necessary also for the period prior

to April 1, 1958.

Learned Attorney-General conceded that the affidavit of R.

C. Dutt affirmed on August 25, 1965 and the further

affidavit of Sisir Kumar Datta on October 4, 1968 pursuant

to the order of this Court dated September 9, 1968 disclosed

all the materials which were before the Central Government

when it passed the order dated April 11, 1963. He further

conceded that the only circumstance suggesting fraud etc.,

in relation to the company's affairs after April 1, 1958 was

the transaction relating to 3,000 preference shares in

Albion Plywoods Ltd., on May 6, 1960 and that but for this

transaction the Government would not have passed the

impugned order. The materials before the Government with

regard to the transaction were as follows : Albion Plywoods

Ltd., had issued 50,000 ordinary shares of Rs. 10 and 5,000

5-1/2% cumulative redeemable preference shares of Rs. 100.

2,000 preference shares were held by New Central Jute Mills

Company Ltd., and 2,000 preference shares were held by

Rohtas Industries Ltd. New Central Jute Mills Co. Ltd. and

the Rohtas Industries Ltd., were both controlled by the Sahu

Jains or Sri S. P. Jain. The preference shares were

redeemable at the option of the Albion Plywoods Ltd., at any

time after 10 years from the date of their issue on

September 7, 1957. In April 1960 New Central Jute Mills

Co., Ltd., sold 2,000 preference shares held by it to M/s.

Bagla & Co., and M/s. Poddar Sons at Rs. 100 per share

against cash payment. On May 6, 1950 Rohtas Industries

Ltd., sold 3,000 preference shares held by it to M/s. Bagla

& Co., at Rs. 100 per share. On the dates when the sales

were effected the management of New Central Jute Mills Co.

Ltd., and Rohtas Industries Ltd., knew that the preference

shares would be converted into ordinary shares. As a matter

of fact Albion Plywoods Ltd., by a special resolution passed

on May 20, 1960 converted 5,000

136

preference shares into 50,000 ordinary shares and M/s. Sahu

Jains were appointed as its managing agents. The market

price of an ordinary share as shown in the Indian Finance

was Rs. 14 on May 13, 1960, Rs. 15-44 on May 20, 1960, Rs.

17 on May 27, 1960, Rs. 17 on June 10, 1960 and Rs. 14 on

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June 17, 1960. The charge is that the management of Rohtas

Industries Ltd., sold the preference shares at an under

value with a view to benefit the managing agents, their

friends and brokers knowing fully well that on conversion

into ordinary shares they would fetch a much higher price.

The charge was originally made with regard to the sale of

2,000 preference shares held by New Central Jute Mills Co.

Ltd., in a letter dated January 27, 1961 addressed by a com-

plainant to the Secretary to the Government of India,

department of company law administration. In course of

investigation into this charge, the regional director,

company law administration, Calcutta, discovered that Rohtas

Industries Ltd., also had sold 3,000 preference shares to

M/s. Bagla & Co., on May 6, 1960. The annual return filed

by Albion Plywoods Ltd., on May 30, 1960 showed that 32,000

ordinary shares in the company were then held by the members

of the Bagla family. These materials are to be found in the

complaint dated January 27, 1961 with regard to the sale of

2,000 preference shares by New Central Jute Mills Co. Ltd.,

and the correspondence passed between the Secretary to the

Government of India, ministry of commerce and industry,

department of company law administration, New Delhi and the

regional director, company law administration, Calcutta. On

the subject of the sale of preference shares there was no

other material before the Government when it passed the

order dated April 11, 1963.

Several things are to be noticed in this connection. No

complaint with regard to the impropriety of the sale of the

preference shares held by Rohtas Industries Ltd. was made to

the Central Government by any of its creditors or members.

There was no material before the Central Government

suggesting that M/s. Bagla & Co., held the preference

shares as benamidars of M/s. Sahu Jains or their friends.

On May 30, 1960 M/s. Bagla & Co., continued to hold 32,000

ordinary shares in Albion Plywoods Ltd. it is not suggested

that the market price of preference shares on May 6, 1960

was more than Rs. 100. The market price of the ordinary

shares fluctuated between Rs. 14 and Rs. 17 between May 13

and June 17, 1960. But there was no material showing that

the huge block of 50,000 ordinary shares issuable on

conversion of 5,000 preference shares could be sold in the

market for more than Rs. 10 per share. No attempt was made

to find out the market price of ordinary shares on May 6,

1960. It now transpires that on that date the price was Rs.

11. The charge that the sale of the Preference shares was

fraudulent or improper was not corn-

137

municated to the Rohtas Industries Ltd., nor were they asked

to give their explanation on the subject.

I think it is a border line case. The Court has no power to

review the facts as an appellate body nor can it substitute

its opinion for that of the Government. But the curious

feature of the case is that on reading the affidavits we are

left with the impression that the Government did not rely on

the transaction relating to the sale of 3,000 preference

shares of Albion Plywoods Ltd., as suggesting fraud. It

appears that the Government passed an order under S. 237(b)

appointing an inspector to investigate the affairs of New

Central Jute Mills Co. Ltd. but it seems that the Government

did not rely on the sale of 2,000 preference shares by the

management of this company as a relevant material for

passing the order, see the report of New Central Jute Mills

v. Finance Ministry(1) at pages 160-1. On the whole, I am

inclined to think that there was no material before the

Government on which it could form the opinion that there

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were circumstances suggesting fraud etc., as mentioned in

the impugned order dated April 11, 1963. 1 -am, therefore,

constrained to hold that it formed the opinion without

applying its mind to the materials before it. The opinion

so formed is in excess of its powers and cannot support the

order under S. 237(b).

In the result, I agree to the order proposed by Hegde, J.

V.P.S. Appeals allowed..

(1) A.I.R. 1966 Cal. 151.

7 Sup C1169-10

138