# THE BARIUM CHE.l\'IICALS L'.J.'D. AND ANR v. THE COMPANY LAW BOARD AND· OTHERS

- **Citation:** [1966] Supp. 1 S.C.R. 311
- **Court:** Supreme Court of India
- **Decided:** 1966-05-04
- **Case number:** Civil Appeal No. 381 of 1966
- **Bench:** A. K. Sarkar, M. Hidayatullah, J. R. MUDHOilKAR, R. S. Bachawat, J. M. Shelat
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-barium-che-l-iicals-l-j-d-and-anr-v-the-company-law-board-and-others-3856
- **Pages:** 62

## Headnote

Companies Act, 1956, ss. lOE, 234, 235, 236 and 237-scope OfWhether s. 237(b) violative of Articles 14 and 19(1) (g) of the Constitution.
T~ Company Law Board was constituted under Section 10E
of the Companies Aet, 1956, and the Central Government delegated
some of its powers under the Act, including those under Section 237,
to•the lil<Mrd. The Government also framed rules under Section 642(1)
ritatl with. Section 1QE(5) called the Company Law Board (Procedure)
Rules lml4 Rule 3 of which empowered the Chairman of the Board to
distribute the business of the Board among himself and other member
or members and to specify the cases or classes of cases which were
to be considered jointly by the Board. On February 6, 1954, nnder
the power vested in him by Rule 3 the Chairman passed an ordev
s)!>eci]y!ng the cases that had to be considered jointly by himself
and the only other member of the Board and distributing the remaining business betwee;-i h'mself and the member.
Under
this
ol'der the business od' ordering investigations under Sections 235 and
23'7 was allotted to himself to be performed by him singly,
Oh May 19, 1965 an order was issued on behalf of the Company
Law Board under Section 237(b) of the Compan'es Act, appointing
E
four inspectors to investigate the affairs of the appellant company,
on the ground that the Board was of the opinion that there were
1.
circumstances suggesting that the business of the appellant company
,..
waB being condu·cted with intent to defraud its creditors, members or
any other persons and that the persons concerned in the management
of the affuirs of the company had in connection therewith been guilty
of fraud, misfeasence and other misconduct towards the
company
and its members.
F
Soon afterwards the appellants filed a petition under Art. 22'6 of
the Constitution for the issue of a wtit quashing the order of the
Board on the grounds, inter alia, that the order had been iS5ued
ma/a fide that there was no material on which such an order could
have been made, etc.
0ne of the affidavits filed in reply to the petition was by the
Chl!ir'.lhan of the Company Law Board, in which it was contended,
inter alia, that there was material on the basis of which the impugnG
ed order was issued and he had himself examined this material and
formed the necessary opinion within the meaning of sec. 237(b) bef0re the issue of the order; and that it was not competent for the
court to go into the question of the adequacy or otherwise of such
materi'al. In the course of replying to some of the allegations in the
petition it was stated in paragraph 14 of the affidavit, however, that
ft.Om memorand:a received from some ex-directors of the company
H
and other exammation it appeared, inter aliu, that there had been
del'ay, bungling and faulty planning of the company's ma.in project
re~ulting_ in double expenditure; that.the company had incurred hui!e
losses; there had been a sharp fall m the price of the cdtnJ)any's
T4S5SCI-22
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sUPR&llE OOURT REPORTS
(1966) BUPP. S.C.R.
shares; and some eminent persons had resigned from the Board of
A
D!rectors of the company because of differences with the Managing
Director on account of the manner in which the affairs of the company were being conducted.
The appellant's petition was dismissed by the High Court.
In the appeal to this Court it was contended on behalf of the appellants:
B
(I) That the order was made made fide on account of the competing interests of a firm in which the Mmister in charge of the department was interested and also because of his personal hostility
against the second petitioner who was the managing director of the
company; that the High Court had erred in deciding the petition on
the footing that the first respondent Board was an independent authority and that it was its Chairman who on his own had formed
the requisite opinion and passed the order and therefore the motive
or the evil eye of the Minister was irrelevant; the High Court also
erred in failing to

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311
THE BARIUM CHE.l\'IICALS L'.J.'D. AND ANR.
v.
THE COMPANY LAW BOARD AND· OTHERS
May 4, 1966
[A. K. SARKAR, C.J., M. HIDAYATULLAH, J. R.
MUDHOilKAR,
R. S. BACHAWAT AND J. M. SHELAT, JJ.]
Companies Act, 1956, ss. lOE, 234, 235, 236 and 237-scope OfWhether s. 237(b) violative of Articles 14 and 19(1) (g) of the Constitution.
T~ Company Law Board was constituted under Section 10E
of the Companies Aet, 1956, and the Central Government delegated
some of its powers under the Act, including those under Section 237,
to•the lil<Mrd. The Government also framed rules under Section 642(1)
ritatl with. Section 1QE(5) called the Company Law Board (Procedure)
Rules lml4 Rule 3 of which empowered the Chairman of the Board to
distribute the business of the Board among himself and other member
or members and to specify the cases or classes of cases which were
to be considered jointly by the Board. On February 6, 1954, nnder
the power vested in him by Rule 3 the Chairman passed an ordev
s)!>eci]y!ng the cases that had to be considered jointly by himself
and the only other member of the Board and distributing the remaining business betwee;-i h'mself and the member.
Under
this
ol'der the business od' ordering investigations under Sections 235 and
23'7 was allotted to himself to be performed by him singly,
Oh May 19, 1965 an order was issued on behalf of the Company
Law Board under Section 237(b) of the Compan'es Act, appointing
E
four inspectors to investigate the affairs of the appellant company,
on the ground that the Board was of the opinion that there were
1.
circumstances suggesting that the business of the appellant company
,..
waB being condu·cted with intent to defraud its creditors, members or
any other persons and that the persons concerned in the management
of the affuirs of the company had in connection therewith been guilty
of fraud, misfeasence and other misconduct towards the
company
and its members.
F
Soon afterwards the appellants filed a petition under Art. 22'6 of
the Constitution for the issue of a wtit quashing the order of the
Board on the grounds, inter alia, that the order had been iS5ued
ma/a fide that there was no material on which such an order could
have been made, etc.
0ne of the affidavits filed in reply to the petition was by the
Chl!ir'.lhan of the Company Law Board, in which it was contended,
inter alia, that there was material on the basis of which the impugnG
ed order was issued and he had himself examined this material and
formed the necessary opinion within the meaning of sec. 237(b) bef0re the issue of the order; and that it was not competent for the
court to go into the question of the adequacy or otherwise of such
materi'al. In the course of replying to some of the allegations in the
petition it was stated in paragraph 14 of the affidavit, however, that
ft.Om memorand:a received from some ex-directors of the company
H
and other exammation it appeared, inter aliu, that there had been
del'ay, bungling and faulty planning of the company's ma.in project
re~ulting_ in double expenditure; that.the company had incurred hui!e
losses; there had been a sharp fall m the price of the cdtnJ)any's
T4S5SCI-22
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sUPR&llE OOURT REPORTS
(1966) BUPP. S.C.R.
shares; and some eminent persons had resigned from the Board of
A
D!rectors of the company because of differences with the Managing
Director on account of the manner in which the affairs of the company were being conducted.
The appellant's petition was dismissed by the High Court.
In the appeal to this Court it was contended on behalf of the appellants:
B
(I) That the order was made made fide on account of the competing interests of a firm in which the Mmister in charge of the department was interested and also because of his personal hostility
against the second petitioner who was the managing director of the
company; that the High Court had erred in deciding the petition on
the footing that the first respondent Board was an independent authority and that it was its Chairman who on his own had formed
the requisite opinion and passed the order and therefore the motive
or the evil eye of the Minister was irrelevant; the High Court also
erred in failing to appreciate that even though the impugned order
was by the Chairman, as under s. 10E(6) it had to receive and in
fact received the Minister's agreement, if the Minister's mala fidea
were established, that would vitiate the order; furthermore, in the
circumstances of the case. the High Court ought to have allowed
the appellants an opportunity to establish their case of mala fide by
the cross-examination of the Minister and the Chairman, both of
whom had flied affidavits.
(2) That clause (b) of Section 237 required two things: (i) the requisite opinion of the Central Government, in the present case, of the
Board, and (ii) the existence of circumstances iuggesting that the
company's business was being conducted as laid down in sub-clause
(i) or that the persons mentioned in sub-clause (ii) were guilty of
fraud, misfeasance or misconduct towards the company or any of its
members; though the opinion to be formed is subjective, the existence of circumstances set out In cl. (b) is a condition precedent to the
formation of such opinion and therefore even if the impui;ned order
were to contain a recital of the existence of those circumstances, the
court can go behind that recital and determine whether they did in
fact exist, that even taking the circumstances said to have been
found by the respondent Board, they were extraneous to sec. 237(b)
and could not constitute a basis for the impugned order.
(3) That the impugned order was in fact made on the basis of
allegations contained in memoranda submitted by four ex-directorw
of the company who continued to be shareholders; and by ordering
an investigation unde.r s. 237(b) the respondent Board had in effec'I
enabled these shareholders to circumvent the provisions of s. 235 &nd
s. 236. On this ground also the impugned order was therefore made
mala fide or was otherwise invalid.
(4) That the impugned order was in any case bad as it was passed by the Chairman of the Respondent Board &lone acting under
rules under which such a power was conferred in contravention of
the provisions of Section lOE. The power under s. 237 was delegated
by the Central Government to the Board as a whole and could not
in turn be sub-delegated to the Chairman alone in the absence of a
provision such as sub-sec. (4A) added to sec. lOE after the impugned
order was issued, and which now enabled the solidarity of the Board
to be broken. Such sub-delegation could not be done in accordance
with rules made under s. 10E(5) which merely enabled the procedure of the Board to be regulated.
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BARIUM CIIEM!CALS v. COMP. LAW BD. (Mudholkar, J.)
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(5) That the impugned order was bad because Section 237(b)
itself was bad as offending against Arts. 14 and 19 of the Constitution.
HELD: (By Hidayatullah, Bachawat and Shelat, JJ., Sarkar C.J.
and Mudholkar J. dissenting): The impugned order must be set aside.
(1) (By the Court): The respondents had failed to show that the
impugned order was passed ma!a fide. [330 E; 335 B-C; 342 F; 354 F-G].
(Per Sarkar C.J. and Mudholkar J.3: The decision to order the
investigation was taken by the Chairman of the respondent Board
and there was nothing to indicate that in arriving at that decision
he was influenced by the Minister. If the decision arrived at by the
Chairman was an independent one, it could not be said to have been
rendered mala fide because it was later approved by the Minister.
[320 D].
In a proceeding under Art. 226 of the Constitution, the normal
rule is, as pointed out by this Conrt in The State of Bombay v. Pur·
shottam Jog Naik [19541 S.C.R. 674, to decide disputed ciuestions on
the basis of affidavits and that it is within the discretion of the High
Conrt whether to allow a person who has sworn an affidavit before
it to be cross-examined or not. The H.gh Conrt having refused permission for the cross-examination, it would not be appropriate for
this Conrt, while hearing an appeal. by special leave, to interfere
lightly with the exercise of its d,scretion. [320 G-H; 321 A].
(Per Shelat J.): The allegations of mala fides in the petition
were not grounded on any knowledge but only on "reasons to believe11. Even for their reasons to believe, the appellants had not dis--
closed any informaton on which they were founded. No particulars
of the main allegations were given. Although in a case of this kind
it would be difficult for a petitioner to have persona! knowledge in
regard to an averment of ma!a fides, where such knowledge is wanting, he must disclose his source of information so that the other side
gets a fair c.hance to verify it and make an effective answer. In the
absence of tangible materials, the only answer which the respondents
could array against the allegations as to ma!a fides would be one of
general denial. [352 D-H].
In a petition under Art. 226, there is undoubtedly ample power
in the High Court to order attendance of a deponent in court for
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being cross-examined. Where it is not possible for the court to arrive
at a definite conclusion on account of there being affidavits on either
side containing allegations and counter-allegations, it would
not
only be desirable but in the interest of justice the duty also of the
court to summon a deponent for cross-examination in order to arrive at the truth. However, the High Court was rightly of the view
that in the present case even if the tv.)o deponents were to be called for cross-examination, they could in the absence of particllars
of allegations of mala fides and the other circumstances of the case,
G
only repeat their denials in the affidavits of the allegations in the
petition and therefore such cross-examination would not take the
court any further than the affidavits. [353 D-H].
(2) (Per Hidayatullah, Bachawat and Shela! JJ. Sarkar, C. J.
and Mudholkar J. dissenting,): The circumstances d'sclosed in paragraph H of the. affidavit must be regarded as the only materials on
H
the basis of which the respondent Board formed the opinion before
ordering an investigatiun under Section 237(b). These circumstances cuuld not reasonably suggest that the business of the company
was being conducted to defraud the creditors, members or other
L/llliSCI-22(•)
SUPl<EME COt;RT Rl:PURTS
[1966] 8UPP. S.C.I\.
persons or that the management wa' guilty of fraud towards the
.l
company and its members; tW..y were therefore extraneous to the
matters mentioned in s. 237(b) and the impugned order was ultra
viTes the Section. [339 A-D, G-H; 340 A; 342 G-H: 343 A~· 365 D-E
367 A.C].
'
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(Per Hidayatullah J.): The power-under Section 2:fl(b) in a
dia:ret1onacy power and the first requirement for its exercise is the
hGnest formation of an opinion that an investigation is necESSary.
B
Th.e next requirement is that ''there arc circumstances suggesting"
the inferences set out in the Section, An action, not based on circumstances suggestmg an inference of the enumerated k•nd will not be
valid. No doubt the formation of opm>on is subjective but the existence of circumstances relevant to the inference as the sine qua non
for action must be demonstrable, If their existence is questioned, it
has to be proved at least prima facie. It is not sufficient to assert, that
the circumstances exist and give no clue to what they are, because
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the aircwnstances must be such M to lead to conclusions of certain dcfini1leness. The conclusions must relate to an intent to defraud, a
fraudulent or unlawful purpose, fraud or misconduct or the withhobiing of information of a particular kind. [335 F-H; 3S6 G-H].
An examination of the affidavit filed by the Chairman of the
r~mrent Board showed that the material examined by the Chairman merely indicated the need for a deeper probe. This was not
suftlc'.ent. 'l'he material must suggest certain inferences and not the
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need for "a deeper probt.:". The former is a definite conclusion the
lat:ter a mere fishing expedition. [338 E-H].
(Pe'!' She lat J .) : Althouugh the formation of opinion i:iy central Government is a purely subjective process c:.nd such an cipiniun
canuot be challenged m a court on the ground of propnety, reasonableness or sufficiency, the Authurity concerned is nevertheless required to arrive at such an opinion from circumstances suggesting
what is set out in sulrelauscs (i), (Ii) or (iii) of s. 237(bJ. The expresii1
sion uclrcurnstances suggesting" cannot support the construction that
even the existence of circumstances is a matter of subjective opinion. It is hard to contemplate that the legislature cou;d have left to
the· subjective 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
exjst and which in its opm:on suggest an intent to defraud or a frauj'
dulent or unlawful purpose. If it ls shown that the circumstances do
not exist or that they are sach that it is imposs:ible for any one to form
an opinion th.arefrom sugge:-.t:We of the matters f'numer.ated in s. 237
(b) the opinion is challenge.1ble on the ground of non-ai;plicat:on of
mind or perversity or on the ground that it was formed on collateral
grounds and was beyond the scope of the statut<>. I 362 H; 363 A-G].
Wer Sarkar C.J., and Mudholkar J., dissenting): An examination of section 23'1 would show that cl. (b) thereof confers a diser&
G
tion upon the Board to appoint an Inspector to investigate the
aft'ains of a company. The words "in the opinion or' govern the
word "there are circumstances suggesting" and not the words "may
do so". The words 'circumstances' and 'suggesting' cannot be dis..c;ociated without making it impossible for the Board to form an 'opinion'
at all. The formation of an opinion must, therefore, be as to whether there are circ:umstances suggesting the existence of one or
H
more of the matters in sub-els. (i) to (iii) and not about anything
else. The opinion must of course nat have been arrived at mala /idi!.
To say that the opinion to be formed must be as to the neeeseit.y
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OARll'M CHE>!TCALS ''· COMP. L.lW Im. (M.uilholi'f'lr, J.)
31'5'
of making an investigation would be making a clear depRrture from
the language in which s. 237 (b) is couched. It is only after the f~
mation of certain opinion by the Board that the stage for exercising the discretion conferred by the provision is reached. The discretion conferred to order an investigation is administrative and not
judicial since its exercise one way or the other does not affect the
rights of a company nor does it lead to any serious consequences
as, for instance, hampering the business of the company. As has
been pointed out by this c·ourt in Raja Narayanalal Bansilal v.
Maned< Phiroz Mistry and Anr. fl9611 1 S.C.R. 412, the investigation undertaken under this provision is for ascertaining facts and
is thus merely exploratory. The scope for judicial review of the action of the Board must, therefore be strictly limited. If it can be
shown that the Board had in fact not formed an opinion its order
could be ooccessfully challenged. There is a difference between not
forming an opinion at all and forming an opinion upon
grounds,
which, if a court could go into that question at all, could be regarded as inapt or insufficient or irrelevant.
The circumstances set out in paragraph 14 of the affidavit of tba
Chairman of the respondent Board were nothing more than certain
conclusions drawn by the Board from some of the material which it
had ·before it. Moreover, the express:on "inter aria" used bv the Chairman v,i<ould show that the conclusions set out by him specifically were
nm the only ones which could be drawn from the material before
the Board. It would not therefore be right to construe the affidavit
to mean that the only conclusions emerging from the material before the Board were those set out in paragraph 14. [352 A-El
(3) (Per Sarkar C. J. and Mudholkar J.): As it could not be
said that the investigation had been ordered either at the instance
of 4 ex-directors of the company or on the sole basis of the memoranda· submitted by: them. there was no contravention of the provisions of Sections 235 and 236 of the Act. f328 C, El.
(4) (Per Sarkar C. J., Mudholkar and Bachawat JJ., Hidayatullall. and Shelat JJ., dissenting): Rule 3 of the Company Law Board
(Procedure) Rules. 1964, ancl the order dated April 6, 1964 made pm--
suant thereto distributing the business of the Board, were both valid.
The impugned order was not therefore invalid because it was made
by the Chairman alone and not by the Board. [33() C. D; 342 BcC].
(Per Sarkar C.J. and Mudholkar J.): Bearing in mind the fact
that the power conferred by Section 237(b) is merely administrative,
the allocati<>n of the business of the Board relating· to the exercise .of
such power must be regarded as a matter of procedure. Strictly sp""-
king the Chairman to whom the businass of the Board is allocated
does not become a delegate of the Board at all. He acts in the name
of the Board and is no more than its agent. But even if he is looked
upon as a delei<ate of the Board and, therefore, sub-delegate vis-avis the ·Central Government, he would be as much subject to the control of the Central Government as the Board itself, for sub-s. (6) of
s. lOE orovides that the Board shall, in the exercise of the powers delegated to it, be subject to the control od' the Central ·Government and
the order distributing the ·business was made with permission of tfie
Central Govermnent. Beating in mind that the maxim delegatus non
wtest delega.re sets out what is merely a rule of construction, subdelegation can be sustained if permitted by an express provisicm or
by nec~ss.ary i_mplication. Where, as here, i.vhat is sub~delegated is
an adm1n1strat1ve power and control over its exercise is retained by
tbe. nominee of Parliament, that is. here tbe Central Government, the
power to make a delegatio" may be inferred. f329 F-H; 330 A-C].
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316;
SUPREME COURT REPORTS
·. [1966) SUPP. S.C.R.
', . (Per Bachwat J.): The function under s. 237(b) irivolves-tl·e exercise of a discretion. Prima facie all the members of the Board acting together were required to discharge this function and they could
not delegate their duty to the Chairman. However,. under ss. 10E(5)
and 642(1), the Central Government may frame rules regulating the
procedure of the Board and generally to carry out the purpose of
the Act. In the context of s. lOE, the rule making power should be
construed liberally. The Central Government has power to constitute the Company Law Board, to delegate its function to the Board
and to control the Board in the exercise of its delegated functions.
In this background, by conferring on the Central Government the
additlonaJ power of framing rules regulating the procedure of the
Board and generally to carry out the purposes of s. lOE, Parliament
must have intended that the internal organisation of the Board and
the mode and manner of transacting its business should be regulated ent'.rely by rules framed by the Government. The Government
had, therefore. power to frame the Company Law Board (Procedure) ·
Rules. 1964 authorising the Chairman to distribute the business of the
Board .. In the exercise of the power conferred by this rule, the Chairman· assiJ?ned the. business under s. 237 to himself. The Chairman
alone could, therefore, pass the impugned order. [341 F-H; 342 .A-Cl-
(Per' Hida'yatullah J.): The new sub-section 4A ~f Section lOE,
which was not there when the impugned order was made. enables the
work of the Board to be distributed among members, while sub-s. (5)
merely enables the procedure of the Board to be regulated. These are
two verv different things. One provides for di<tribution of work in
such a wav that each constituent part of the Board. properlv authorised. becomes the Board. The other provides for the procedure of
the Board. What is the Board is not a question which admits of solu~
tion bv nrocedural rules but bv the enactment of a substantive provic:;ion ::illowlnr{ for a different ifeli:>i::r::ition. Snrh an
en~ctment has
been framed in relation to the Tribunal constituted under s. !OB and
has nnw bPen framed under s. lOE ::i lso. ThP- new sub-se-ction involvPS
a dPleg::ition of the powers of. the Central Government to a member
of the Board which the Act nreviously allowed to be made . to the
Board onlv. The statute, as it was formerly, gave no authority to delegat.> if differentlv or. to another nerson or persons. When it spoke of
procedure in sub-section (5) it spoke of the procedure of the Board
;:ic:: ronstitnterl. Thi:> lacnn~ in thp Art mu~t h::ivp h,,.,,...., .f',..,lt; otherwise
there was no need to enact sub-section (4A), [334 B-E].
<PeT Shel at · .. T.l: Th~ statut,, hairi~.i nermitterl -the rleleitat;on of
powers to the Board only as the statutory Authority the powers so
dele<rated have to be exercised by the Board and not bv its comoonents. To authorise . its Chairman to hand over those functions and
pow0 rs to the Board onlv as the statutorv Authoritv. tl-e powers so
bv the Act. The efl'0 ct of r. 3 and the order of distribution of work
made in PUrsuance thereof wac:; not laving dowri a procedure but authotisin~ and making. a sub..aele"ation in favour of the members.
The only procedure which the Government could prescribe was the
pro<'Pdure in ·rel:Jtion to Bo~rd. the manner
in which
it should
discharge and exercise the functions and pawers delegated to it, but
it canlrl not make_ a nrovi~inn which under the cloak of procedure authorfred sub-dele1tation. r3R9 F-H; 370 A, Bl.
(5) (By the Court): The provisions of Section 2:J71b) were not
,,;,,JoHve of Articles 14 and 19 of the Constitution. f328 E-G; 342 D-F;
371 H].
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SecF'>ns ?"4. 2~5. 236 onn 2371b) l!av<> nower to different authnrities i.e. the Registrar and the Government, provided powers which
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RARIIJ~! CHEMICAL~ v. COMP. I.AW l!D. (Mudholkar, J.)
317
are different in extent and nature, exercisable in sets of circumstances and in a manner different from one an?ther. Therefore,
there is no question of discriminatory power having been vested
in the Government under these Sections to pick and choose between
rone company and the other. [370 G, H].
When investigation is ordered, there would be inco11venience
in the carrying on of the business of the company. It might also perhaps shake the credit of a dompany. But an investigation directed
under section 237(b) is essentially of an exploratory character and
it is not as if any restriction is placed on the right of the concerned
company to carry on its business and no restrictions are imposed on
those who carry on the company's affairs. Even if it is regarded as
a restriction, it is not possible to say that it is not protected as a
reasonable restriction under Clause 6 of Art. 19(1). r371 B-D].
Case Jaw referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
381 of
1966.
Appeal by special leave from the judgment and order dated
October 7, 1965 of. the Punjab High Court (Circuit Bench) at
Delhi in Civil Writ No. 1626-C of 1965.
D
M. C. Setalvad, R. K. Garg and S. C. Agarwala, for the
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appellants.
C. K. Daphtary, Attorney-General, B. R. L. Iyengar, R. K. P.
Shankardass and R. H. Dhebar, for respondents Nos. 1 and 3 to
7.
S. Mohan Kumaramangalam, C. Ramakrishna and A. V. V.
Nair, for respondent No. 2.
The dissenting Opinion of SARKAR, CJ. and MUDHOLKAR, J.
was delivered by MUDHOLKAR, J
HIDAYATULLAH, BACHAWAT and
SHE LAT JJ. delivered separate judgments allowing the Appeal.
Mudholkar, J. On May 19, 1965 Mr. D. S. Dang,
Secretary
of the Company Law Board issued an order on behalf
of the Company Law Board made under s. 237 (b) of the Companies Act, 1956 appointing 4 persons as Inspectors for investigat·
ing the affairs of the Barium Chemicals Ltd., appellant No. I
before us, since its incorporation in the year 1961 and to report to
the Company Law Board inter a/ia "all the irregularities and contravention in respect of the provisions of the Companies Act, 1956
or of any other law for the time being in force and the person or
persons responsible for such irregularities
and contraventions."
The order was made by the Chairman of the Board, Mr. R. C. Dutt
on behalf of the Board by virtue of the powers conferred on him
by certain rules to which we shall refer later. On June 4, 1965 the
Company preferred a writ petition under Art. 226 of the Constitution in the Punjab High Omrt for the issue of a writ of mandamus
or other appropriate writ, direction or order quashing the order of
the Board dated May 19, 1965. The Managing Director, Mr. Balasubramanian joined in the petition as petitioner No. 2. The writ
petition is directed against 7 respondents, the first of which is the
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RUPRJ!lll: COURT IY'JPORTS
( Hl6CJ SUl'P. B.0.R,
Company Law Board. 1'he second rospondMt 1s Mr. T" T.
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Ktishnamac.hari, whc> was at that time Minister for Finance in the
Government of India. The Inspectors a.ppointed are respondents 3
to 6 and Mr. Dang 1s the 7th respondent. Apart from the relief of
quashin~ the order of May 19, 1965 the appellants sought the issue
of a writ restrammg the Company Law Board and the Jnspei:ton
Cr~ giving effect to the order dated May 19, 1%5 and also so14fbt
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~Q81et-Other incideaw.I reliefs: The order of the Board \V'.tS challe11ged
011 5 grounds which are briefly as follows:
m that the order was made ma/a fide;
(2) tbat in making the ordi:r the Board hd acted on
material extraneous to the matters mentioned in
s 237(b) of the Companies Act:
(3) that the order having in fact been made at the instance of the shareholders is invalid and on a true
construction of s. 2~7 this could not be done;
(4) that the order was invalid because it was made by
the Chairman of the Board and not hy the Board;
a.nd
(5) that the provisions of s. 237(b) arc void as offending
Arts. 14 and 19(1) ~) of the Coastitution.
The allegations of ma/a (ides were denied on behalf of the
r.cspo.nd~n\S. They dbputeil thl: validity of aU th!: other grounds
raised by the petitioners. The High Court rejcded the contentio!l6
urged before it on behalf of the appellants and dismissed the writ
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petitic:m. The appellants thereafter sought to obtain a certificate of
fitness for appeal to this Court; but the High Court refused to grant
such a certificate. They have now come up to this Court by s~cial
leave.
In order to apprcci:ue tbe argument' ao..lressed OOfore us. a
hr.iel statement of the rnlevant facts would be nec~ury. The Comf
pany was registered in the ye111 1%1 and md an <Wtborised capital
of Rs, 1 crQCe divided into 100.000 shares of Rs. 100 ea1::h.
Ju
pJimary object wa.s to carry 011 business of 1uamuactwing all type~
of. bariu111 c_ornp.olUl<ls. Appc.lla.nt No. 2 wa~ appointed M~
Oir~~tor of the Company from December 5, 196) <U1d his appointment· ao.d remuneration were. approved by the Central G1ive<nruent on July 30, 1962. The erection of the plant was unde!'taken
Q
by M/s. L. A. Mitchell Ltd., of Manchc~ler in pursuance of a
C9lla.bQiatioo agre.ement be.tween it and the cnlllμoi.ny eiitercd ~
Octob~r. 1961 and approved by the Cc.ntral Government in NovOlllbi:r of that year. Thereafter a permit for importing the requisi.te
machinery was granted to the CO,!Dpany. The issued capitaJ of the
O>mpa.oy was Rs. 5.0.00.000 aw the public was invited lo s~ ¥
scribe for shares in the Company. It is sakl that the issue w.a6 .O"fi·
s11bscribe4 by MarC'Jl li. 1962,.
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HARLUM CHEMIOALS v. COMP. LAW BD. (Mudholkar, J.)
319
It would seem that soon after the collaboration agreement was
cntere.cl into MI s. L. A. Mitchell Ltd., was taken over by a financial group (MI s. Pearson & Co. Ltd.), to which a pers.011 nam.ed
Lvrd. Poole belonged. It would appear that as the work of setting
up of the plant was being delayed the Company sent a notice to
M/s. Mitohell Ltd., on April 2, 1965 in which the Company sta.ted
that if the plant was not completely installed and got into mnuing
ord.er by June I, 1965 the Company will have to make aJternatiye
arrangements and that it would hold MI s. L. A. Mitchell Ltd.,
liable to pay damages to the Company for the loss suffered by it.
As a result of the notice Lord Poole visited India in April/May,
1965. In his opinion the design of the plant was defective. Certain
negotiations took place between the Company and Lord Poole in
the co.ursc of which an undertaking was given by Lord Poole on
be.half of the collaborators that the work would be completed with
necessary alterations and modifications in accordance with the
report of M/s. Humphrey & Co., and that the collaborators wouJd
spend an additional amount upto £250,000 as may be required for
the purpose. It is said that the p'ant was producing at that time
only 25 per cent of its installed capacity but that according to the
assurance given by Lord Poole it would yield full production by
April, 1966.
According to the appellants, before entering into a collaboration agreement with MI s. L. A. Mitchell Ltd., the appellant No .. 2
Balasubramanian was negotiating with a German firm named.Kali
Chemie A. G. of Hanover for obtaining their collaborat\on. It is
said that the firm of MI s. T. T. Krishnamachari & Sons were and
still are the sole agents in India for some of the products of Kali
Chemie. The firm of T. T. Krishnamachari & Sons appro.ached
appellant No. 2 for the grant of sole selling agency of the products
of the plant to be established in collaboration with Kali Chemie.
Appellant No. 2 did not agree to this with the result that the
c.oinpany's negotiations with Kali Chemie broke down. The appellants also say that T. T. Krishnamachari & Sons were later also
granted a licence to set up a plant for
manufacturing barium
chemicals but that on appellant No. 2 bringing certain facts to th.e
notice of Mr. Nehru the licence in favour of T. T. Krishnamachari
& Sons was revoked.
The relevance of these facts is in connection with the plea of ma/a {ides.
On this part of the case the
appellant's contention is that the Chairman of the Company Law
Board Mr. R. C. Dutt made the order for investigation into the
affairs of a.ppellant No. I at the instance of Mr. T. T. Krishll;!machari, the then Finance Minister and also because of his bias
against appellant No. 2.
The suggestion is that as the licence
of M/s. T. T. Krishnamachari & Sons was revoked and as they
were not even given sole selling agency for the sale of the products
of barium chemicals Mr. T. T. Krishnamachari wanted action
to be taken under this nrovision either for penalising appellant
No. 1 or putting pressure on it.
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SUPRnllo: COURT REPORTS
[1960) WPP. S.C.R.
A lengthy argument was addressed belore us by Mr. Setalvad
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bearing on the question of ma/a fides in tbe course of which he
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referred us to certain documents.
He also wanted us to bear in
mind the sequence in which certain events occurred and said that
these would indicate that the former Finance Minister must have
been instrumental in having an order under s. 237(b) made by the B
Chairman of the Board. We were, however, not impressed by this
argument.
Our learned brother Shelat has dealt with this aspect
of the matter fully in his judgment and as we agree with him it is
not necessary to say much on the point. We would, however, like
to refer to and deal with one aspect of the argument bearing on
the question of ma/a fides.
Mr. Setalvad points out that the Company Law Board had decided in December 1964 to take action c
against appellant No. 1 under s. 237(b) and had actually obtained
approval of Mr. T. T. Krishnamachari to the proposed action.
Therefore, according to him tbe real order is of Mr. Krishnamachari even though the order is expressed in the name of the Board.
We find no substance in the argument. The decision to take action was already taken by the Chairman and there is nothing to
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indicate that in arriving at that decision he was influenced by the D
Finance Minister.
If the decision arrived at by the Chairman
was an independent one it cannot be said to have been rendered
ma/a fide because it was later approved by Mr. Krishnamachari
whose sons undoubtedly constitute the partnership firm of M/s.
T. T. Krishnamachari & Sons.
It is also suggested by Mr.
Setalvad that the action approved of in December, 1964 was delayed till May, 1965 because in the interval some negotiations with
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Kali Chemie had been started and had they ended fruitfully M /s.
T.T. Krishnamachari & Sons would have got the sole selling agency
of the products of barium chemicals.
Now it docs seem from
certain material brought to our notice that negotiations with Kali
Chemic were revived by appellant No. 2 because of the difficulties
which were being experienced in the working of the collaboration
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agreement with M/s. L. A. Mitchell Ltd. No material. however,
is placed before us from which it could be reasonably inferred that
had the negotiations with
Kali
Chemie fructified M / s. T. T.
Krishnamachari & Sons would have secured the sole monopoly
for sale of the products of barium chemicals. One more point was
urged in connection with this aspect of the argument and it is that
the appellants were not given an opportunity to cross-examine
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Mr. T. T. Krishnamachari and Mr. Dutt. In our opinion, in a proceeding under Art. 226 of the Constitution the normal rule is, as
pointed out by this Court in The State of Bombay v. Purshottam Jog
Naik
to decide disputed questions on the basis of affidavits and
that it is within the discretion of the High Court whether to allow
a person who has sworn an affidavit before it-as indeed Mr.
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Krishnamachari and Mr. Dutt have-to be cross-examined or not
to permit it.
In exercise of its discretion the High Court has re-
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BARIUM CHEMIOALR v. COMP. LAW HD. (Mudholkar, J.)
321
fused permission to cross-examine them.
In such a case it would
not be appropriate for this Court while hearing an appeal by special leave to interfere lightly with the exercise of that discretion.
Mr.
Setalvad said that as the appellants had made out a
prima facie case of ma/a fides in their affidavits, and as these allegations had been denied by the respondents, the High Court was
in error in refusing permission to the appellants to cross-examine
the persons who swore the affidavits on the side of the respondents.
We are not aware of the rule on which Mr. Setalvad bases himself. There is nothing to show that the High Court thought that
a prima facie case of ma/a fides had been made out. Even in such
a case a court might well hold that it has been demolished by
the affidavits in answer. The court has to find the facts and if it
finds that it can do so without cross-examination it is not compelled to permit cross-examination.
We have no reason to think
that the High Court could not have ascertained the facts on the
affidavits themselves.
Coming to the second point, it would be desirable to reproD
duce s. 237 which reads thus:
"Without prejudice to its powers under section 235
the Central Government-
(a) shall 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
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may direct, ifF
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(i) the company, by special resolution, or
(ii) the Court, by order,
declares that the affairs of the company ought to be investigated
by an inspector appointed by the Central Government; and
(b) may do so 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, or in a manner oppressive of any of its members, or that the company was
formed for any fraudulent or unlawful purpose; or
(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 members; or
(iii) that the members of the company have not
been given all the information with respect to its
li966) SUPP. R.r.R.
atfairs which they might reai;onably 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."
In view of the fact that the Central Government, by virtue
of the (l<Dwers conferred by ss. 10-E and 637 delegated its powers
llll<ller s. 237 to the Company Law Board we shall read s. 237 as
ii. in place of the WPrds "Central Government"' there arc the words
"Company Law Board" Of for brt!vity 'Board'. According to Mr.
Setalvad. cl. (b) of s. 237 requires two things: (I) the opinion of
the Board and (2) the existence of circumstances suggesting one
~ more of the matters specified in sub-els. (i) to (iiil. He oontends
tllllt th1>ugh the opinion of the Board is subjective the existence
of. circumstances set out in the sub-els. (i) to (iii) is a conditio11
precedent to the formation of the opinion. Therefore, according
to him.
the Court ;, entitled
to a.<ccrt;,in whether in f:tct any of
those circumstances exists.
The Attorney-General disputes this
construction and contends that the clause is incapable of a dichotomy and that the subjective process embraces the formation of an
opinion that circumstances suggestive of any of the matters comprised in sub-els. (i) to <iii! exist.
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Once it is conceded that the formation of an opinion by the
Board is intended to be subjective-and if the provision is constitutional which in our view it is -the question would arise: what
is that about which the Board is entitled to form an opinion? The
opinion must necessarily concern the existence or non-existence
of' facts suggesting the things ment 'oncd in the several sub-clauses
of cl. (b). An examination of the section would show that ol. <b)
theroof confers a discretion upon the Board to appoint an Inspcc·
tor to investigate the affairs of a company.
The words "in the
opinion of" govern the words "there arc circumstances suggesting"
and oot the words "may do so".
The words 'circumstances' and
'suggesting' cannot he dissociated without making it impossible
for the Board to form an 'opinion' at all.
The formation of an
opinion must. therefore. be as to whether there are circumstances
suggesting the existence of one or more of the matters in sub-els.
(j) to (iii) and not about anything else.
The
opinion must of a,
course not have been axrivcd at mala fide.
Tu ·say that the opinion
to be forme<I must be as to the necessity of making an investigation would be makinμ a clear departure from the language in which
s. 237<bl is couched.
It is only
after the formation of certain
opinion by the Board that the stage for exercising the discretion H
conferred by the provision. is reached.
The discretion conferred
to order an investig.~tion is administrative and not judicial since
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BARIUM C'HEMl('Jd.~. I'. COl\1P. I.AV{ J:\,), (illur///lllkar, J.)
323
its exercise one way or the other does not alfect the rights of a company nor does it lead to any serious consequences as, for .instance,
hampering the business of the company.
As has been pomted out
by this Court in Raja Narayanalal Bansilal v. Maneck Phiroz
Mistry & Anr.(') the investigc.tion undertaken under this provision
is for ascertaining facts and is thus merely exploratory.