# ROHTAS INDUSl'RIES LTD v. S. D. AGARWAL & ANR

- **Citation:** [1969] 3 S.C.R. 108
- **Court:** Supreme Court of India
- **Decided:** 1968-12-16
- **Bench:** S. M. Sikri, R. S. Bachawat, K. S. Iiegde
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/rohtas-indusl-ries-ltd-v-s-d-agarwal-anr-4836
- **Pages:** 30

## Headnote

Indian Companies Act (1 of 1956), s. 237 (b)(i) and (11)-Circumstances suggesting fraud-Existence of-II condition precedent to action
under section.
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On May 20, 1960, Albion Plywoods Ltd. resolved at a general meeting
to convert its preference shares into ordinary shares. Ml s. Sahu Joins
were its managing agents. Some time before, in April 1960, New Central'
Jute Mills Co. Ltd. had sold the preference shares of Albion Pl~s C
which it was holding.
One S. P. Jain, against whom proeeedmgs in
criminal courts were pendin~ for acts of misfeasance and malfeasance
in relation to other comparues, 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, Gove.rnment 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
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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-com,Pany had also ~old 3000 preference
sha'res of Albion Plywoods which 1t was holding, on May 6, 1960. The
appeJlant-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 investigate into
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the affairs of the appellant-company and to report thereon to the Central
Government, on the basis that the sale of preference sha'res was a fraudulent ·transaction considered in the background of the association of S. P.
Jain with the appellant-company and other companies.
The appellantcompany filed a writ petition challengin$ the order. The High Court
dismissed it on the ground that the opmion of the Central Government
was not open to judicial review and that the declaration of the GovernF
ment 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 c .. re 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
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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 o'r its members; that
is, though the opinion of ~~e Government is subjectiv~, the existen~e. 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 existe~ce of such circumstances in the order, but could detei'mioe,
whether the circumstances did in fact exist, and whether the Central
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Government took extraneous matters into consideration.
HELD (per Sikri an& Hegde, JJ.) : Sections 235 to 237 are allied
sections and form a scheme for investigation into the affaiiil of a company.
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ROHTAS INDUSTRIES V. S. D. AGARWAL
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
tak_es 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 busi

## Text

_Characters 0–39,966 of 82,599. This is a partial read: ask again with offset=39966 for what follows._

ROHTAS INDUSl'RIES LTD.
v.
S. D. AGARWAL & ANR.
December 16, 1968
[S. M. SIKRI, R. S. BACHAWAT AND K. S. IIEGDE, JJ.)
Indian Companies Act (1 of 1956), s. 237 (b)(i) and (11)-Circumstances suggesting fraud-Existence of-II condition precedent to action
under section.
·
A
B
On May 20, 1960, Albion Plywoods Ltd. resolved at a general meeting
to convert its preference shares into ordinary shares. Ml s. Sahu Joins
were its managing agents. Some time before, in April 1960, New Central'
Jute Mills Co. Ltd. had sold the preference shares of Albion Pl~s C
which it was holding.
One S. P. Jain, against whom proeeedmgs in
criminal courts were pendin~ for acts of misfeasance and malfeasance
in relation to other comparues, 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, Gove.rnment 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
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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-com,Pany had also ~old 3000 preference
sha'res of Albion Plywoods which 1t was holding, on May 6, 1960. The
appeJlant-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 investigate into
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the affairs of the appellant-company and to report thereon to the Central
Government, on the basis that the sale of preference sha'res was a fraudulent ·transaction considered in the background of the association of S. P.
Jain with the appellant-company and other companies.
The appellantcompany filed a writ petition challengin$ the order. The High Court
dismissed it on the ground that the opmion of the Central Government
was not open to judicial review and that the declaration of the GovernF
ment 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 c .. re 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
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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 o'r its members; that
is, though the opinion of ~~e Government is subjectiv~, the existen~e. 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 existe~ce of such circumstances in the order, but could detei'mioe,
whether the circumstances did in fact exist, and whether the Central
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Government took extraneous matters into consideration.
HELD (per Sikri an& Hegde, JJ.) : Sections 235 to 237 are allied
sections and form a scheme for investigation into the affaiiil of a company.
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ROHTAS INDUSTRIES V. S. D. AGARWAL
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
tak_es 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
Jt'eSCribed under s. 237(b) is not the standard required of an ordinary
citi7.en but that of an expert who would take into consideration only
relevant material. [117 F; 118 G-H; 119 B, E; 128 H; 129 A-El
Observations of Hidayatullah and Shela!, JJ. in Barium Chemicals v.
Company Law Board, [1966) Supp. S.C.R. 311, followed.
Padfield v. Minister of Agriculture, [1968) 1 All E.R. 694, Commissumer of Customs dt 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 2'.ealand 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. Saathy dt Anr. [1953] S.C.R. 334, Joseph
Kuruvilla Vellukunnel v. The Reserve Bank of India dt Ors.
[1962)
3
supp. S.C.R. 632, Hubli Electricity Co. Ltd. v. Province of
Bombcy.
L.R. Vol. LXXVJ 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 suseicion about the transaction it should have probed further into
the matter smce the order could not be justified on the material before it.
'The fact that one of the leading directors of the appellant-oompany 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 consideration 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-DI
(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
SUPREME COURT REPORTS
(1969] 3 S.C.R.
fers an administrative and not a judicial power. The power is discri:bonary
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 circunJstances.. If the opinion of an administrative agency is the condition
preqedent 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 ware 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 fulfille<!.
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
ho'lestly form the opinion or that in forming it, it did not apply its mind.
Within these narrow limits the opinion of the Central Government is not
conclusive and can be challenged in a Court, but the Court bas no power
to revic\V the facts a~ an appellate body nor can it substitute its opinion
for that of the Gove'rnmeot._ Had the opinion been conclus.ive it would
have ueen opon to challenge as violative of Arts.
14 and 19 of the Constitution. jl31 E-H; 132 A-F: 133 El
Corporation of Calcutta v. Calcutta Tramways Co. Ltd.
[1964]
5
S.C.R. 25, Joseph Kuruville Vellukunnel v. Reserve Bcnk of India, [1962]
Supp. 3 S.C.R. 632, Huhli Electricity Co. v. Province of Bombay, L.R. 76
I.A. 57. Ross-Clunis v. Papcdopo111/os & Ors .. [1958J 2 All E.il..
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 Mcdras v. C. P. Sarathy
and Anr .. [1953) S.C.R. 334, Swadeshi Cotton Mills Co. Ltd. v. Stcte of
U.P. & Ors., [1962] 1 S.C.R. 422 and State of Bombay v. K. P. Krishnan,
& Ors. [1961] 1 S.C.R. 227, referred to.
The learned Judge's own observations in Bariu1n Chemicals v. Compa1;y Lair Board, [1966] Supp. S.C.R. 311, 343, explained.
In the present case, no complaint with regard to the impropriety of
the •ale of preference shares of Albion Plywoods was made to the Central
Government. There \\'as no material suggesting that the purchasers were
benaniidars of Ml 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 shO\\'
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 Gove'rnment 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 ·ci'rcumstances 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, DJ
OVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2274
to 2276 of 1966.
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ROHTAS INDUSTRIES v. s. D. AGARWAL (Hegde, J.)
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. 18of1966, 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.
S!KRI and K. s.
HEGDE, JJ. was
delivered by HEGDE, J.
R. S. BACHA WAT, 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.I/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
u,nder the Indian Companies Act, 1913 having its registered 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.I/ 63
Government of India,
Ministry of Commerce and Industry,
Department of Company Law Administration.
ORDER
Whereas the Central Government is o[ the opinion
that there are circumstances suggesting that the busi-
!less o~ Rohtas Industries I;imited a company having
its registered office at Dalmtanagar, 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 mem hers,
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
SUPREME COURT REPORTS
[1969] 3 S.C.R.
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
I 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
contraventions 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 whb are responsible for such irregularities and contraventions.
(2) The Inspector shall complete the investigation
and submit silt 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.
This 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 extended.
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 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 Government 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.
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ROHTAS INDUSTRIES v. s. D. AGARWAL (Hegde, !.)
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 staled 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 Dept!. 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 enquired 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 Gov"
ernment 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 11th
Ap~il 1963, Shri Jain is also being proceeded
agamst 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 1 lth April, 1963 specifically
as to the misconduct on the part of the manage-
114
SUPREME COURT REPORTS
[1969] 3 S.C.R.
ment of the petitioner company in the conduct
of its affairs."
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, !.earned 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 extenso.
On~
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 :: 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 alleA
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ROHTAS INDUSTRIES v. s. D. AGARWAL (Hegde, J.)
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
proceeding, that had taken place earlier which were within the
knowledge of the Government.
ln 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 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 Plywoods 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 o.f Rs. 10 each and Rs. 5,000 prefereince shares o.f the face value of Rs. 100 each. - Though the preference shares were not by right convertible into ordinary shares,
it appea.rs in about the end of April or beginning of May, 1960,
the ~lb10n 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 Mis. Bagla & Co. for the face value. Annexure
'C'
_w~s fo~arded to the R~gio~al Director, Company Law
Adm1mstra110n, Calcutta for mqurry 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
SUPREME COURT REPORTS
[1969] 3 S.C.R.
!ant company.
The Regional Director submitted his report on
November 10, 1961. In his report he opined that the transacti~n
complained of is of a doubtful character and therefore further mquiry 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.f 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 :
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"I have been able to gather the following informaE
tion 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 preference shares were sold to Mis Bagla & Co., on 6th May,
F
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 Albioa
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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
ff
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. 11.
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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 nanies
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
informations. Admittedly there was no ma~rial 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 -0f 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 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;
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(b) 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 IITTSpector 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 appointi;ng 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 considered 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 comA
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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 Central Government has to form an opinion that there are circumstances 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. 23 7 (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
~efor.e it, then the same is lia~l~ to be sti:uck down. This position IS also clear from the decmon of this Court in Barium
Chemicals and Anr .. v. Company Law Board and Anr.(').
It was urged by Mr. Setalvad, learned Counsel for the appellant 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 ~ing C?nducted as laid down in sub-cl.(1) or that the persons
mentioned m 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 Govern-
~ent is s~~iective, the existence of circumstances set out in cl. (b)
IS a condtbon 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.
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[1969) 3 S.C.R·
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
wnsicLeration. 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 exclusi.Yely within the discretion of the Central Government and the
statement that the Central Government had formed the 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(')
which considered the scope of s. 237 (b) illustrates that difficulty
In that case Hidayatullah, J.
(our present Chief Juslice)
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 conclusi~ 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-els.
(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
(I) [1966] Supp. S.C.R. 311.
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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.1. and Mudholkar, 1. 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(') 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(') 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 formdd by the State 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
au
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 or<Jer
of reference cfosely 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,
(I) (1966] Supp. S.C.R. 311.
7Sup.CJ/69-S
(2) [1953J s.c.R.