JUDGMENT D.K. Kapur, J.
1. The writ petition under consideration is concerned with certain orders passed under s. 408 of the Companies Act, 1956, in respect of M/s. National Rayon Corporation Ltd. The petitioner before the court is a shareholder of the company. He holds 1,100 equity shares in the capital of the company; the total issued equity capital is 5,50,917 shares of Rs. 100 each. Undoubtedly, the company in question is a successful industrial enterprise with an impressive record as is revealed from its annual reports for various years. Except in the years 1976 and 1977, the company has made substantial profits and except in those years, the shareholders have been getting good dividends. All parties before us are agreed that on 11th July, 1977, the Company Law Board had to pass an order under s. 408 of the Companies Act, 1956, appointing certain Government directors in view of what happened in the years 1976 and 1977. As far as the parties before this court are concerned, it is also the common case that the "Kapadias" were in control of the company at that time and the order passed on 11th July, 1977, was necessitated by the manner in which they had been managing the company. It may be mentioned here that, even earlier, there were Government directors appointed under s. 408 of the Act, but at that time, this section allowed only two Government directors to be appointed. The section was substantially amended by Act, 41, of 1974, to enable the Central Govt. to appoint as many directors as it thought necessary to effectively safeguard the interests of the company or its shareholders or in the public interest. The amendment was effective from 1st February, 1975, and hence, after that date, it is possible for the Government to appoint as many directors as it likes. In fact, by the order dated 11th July, 1977, as many as eight directors were appointed; these are respondents Nos. 5 to 12 before us. There were in addition three directors representing shareholding of financial institutions and there were there other shareholder directors. These are respondents Nos. 13 to 17 mentioned in the petition. When the petition was initially filed, the grievance of the petitioner was that a notice dated 27th May, 1980, had been issued concerning the question whether the order under s. 408 of the Act should be extended but this had not been served on the shareholders, except on some major shareholders, like the Unit Trust of India, General insurance Corporation of India, I. C. I. C. Ltd. and the Life Insurance Corporation. The petition has since been amended because, after the petition had been filed, the Company Law Board passed an order under s. 408 on 7th July, 1980, which merely extended the appointment of the previous Government directors for one month. Then on 6th August 1980, another order was passed by the Company Law Board extending the period again for one month. Then on 7th August, 1980, the Central Govt. Board to pass orders under s. 408 of the Act. Finally, on 9th September, 1980, the Central Govt. passed a new order appointing eight new directors as Government directors. This order appointed completely a different set of persons who have been added as respondents Nos. 22 to 29, in the amended petition.
2. We are concerned in this petition with the order passed by the Company Law Board extending the term of office of the previously appointed eight Government directors, and then the order of the Central Govt. appointing eight new persons to be Government directors for a further period of these years.
3. Undoubtedly, the power under s. 408 of the Act as it now stands is not unlimited. The power to appoint depends on the satisfaction of certain pre-conditions. The power to appoint enables a person being appointed as director for three years on any one occasion. The case of the petitioner is that whatever the situation might have been in July, 1977, when the initial order was passed, there had been a substantial change due to the fact that eight Government directors had been running the company as the majority on the Board, for a period of three years. Therefore, the situation when the question arose as to whether the order should be extended was quite different. At the same time, even the regular shareholder-directors, which numbered seven, were dominated by the financial institutions. According to the position as it now exists, it is common ground that there are 15 directors represent the financial institutions. The remaining three represent the ordinary shareholders. Even if the Government directors were not there, the majority on the Board would be of the financial institutions. In short, the case of the petitioner is that there has been a radical change in the circumstances during the period 1977 to 1980 and the question whether Government directors should or should not be appointed, and how many should be appointed, has to be considered from a different standpoint, as the situation which existed when the initial order was passed in 1977, no longer exists.
4. The case of the respondents, very shortly set out, is that there had been a substantial improvement in the situation of the company due to the Government's order. The new board appointed by the Government in 1977 had undertaken expansion programmes, and suits and other claims had been instituted against the previous management and others to recover amounts due, which had been siphoned off by the previous management. It was, therefore, necessary to maintain the status quo by retaining a board dominated by Government directors. It is also pleaded that the petitioner as a mere shareholder had no locus standi to challenge the decision of the Government which had the approval of the majority of the shareholders of the company. Before dealing at length with the rival contentions, it will be useful to refer to s. 408 of the Act at this stage.
5. As it now stands, sub-s. (1) reads as follows :
"(1) Notwithstanding anything contained in this Act, the Central Government much appoint such number of persons as the Central Government may, by order in writing, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interest to hold office as directors thereof for such period, not exceeding three years on any one occasion, as it may think fit, if the Central Government of its own motion or on the application of not less than one hundred members of the company or of members of the company holding not less than one-tenth of the total voting power therein, is satisfied, after such inquiry as it demands fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest :
Provided that in lieu of passing an order as aforesaid, the Central Government may, if the company has not view itself to the option given to it under section 265, direct the company to amend its articles in the manner provided in that section and make fresh appointments of directors in pursuance of the articles as so amended, within such time as may be specified in that behalf by the Central Government."
6. The section shows that the power to appoint directors is to be exercised for safeguarding the interests of the company, or the shareholders of the company, or the public interest. It means that the section can be used for three possible situations. Furthermore, if the power is to be exercised, there is no limit on the number of persons that the Central Govt. may appoint as directors. Therefore, complete control of the company can be taken by a board of directors appointed by the Central Govt. as the other directors would be a minority. This is a great power, because, virtually the Central Govt. can take the control of the company out of the hands of an existing management and put it into the hands of its own appointees. The previous section, as it stood before the amendment made in 1974, gave only a limited power to the Central Govt. to appoint additional directors on the board.
7. If the power as to be exercised, the persons appointed can hold office as directors for periods not exceeding three years on any one occasion. Then the section continues that the Central Govt. may exercise the power either on its own motion or on the application of not less than one hundred members of the company or of members of the company holding not less than one-tenth of the total voting power. This power is analogous to the power exercised by the court under ss. 397 and 398 of the Companies Act, 1956. There also, s. 399 states that an application can be made to the court by one hundred members, or not less, than one-tenth of the total number of its members, whichever is less, or members of a company holding not less than one-tenth of the share capital. This means that the same persons who could have applied to the court under ss. 397 and 398 for relief against oppression, mismanagement, etc., can also apply to the Central Govt. This section (s. 408) is to be found in the same chapter which contains ss. 397 and 398. The heading of this Chap. VI is "Prevention of Oppression and Mismanagement". The Legislature has given similar power to the court, as well as to the Central Govt. Now we come to the limitations placed on the Central Govt.'s powers, which are to be found in the last portion of s. 408(1). Here it is stated that the Government has to be satisfied after such inquiry as it deems fit to make, that it is necessary to make the appointment for appointments in order to prevent the affairs of the company being company or in a manner which is prejudicial to the interests of the company or to public interest. The last words of the section show that the condition to be satisfied before making the order are similar to the conditions which have to be satisfied before the court exercises its powers under ss. 397 and 398. It may be recalled that s. 397 gives the power to the court to give relief if the affairs of a company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members. Similarly, so under s. 398. The wording of ss. 397 and 398 overlap, but the intention of the two sections is that one should operate in the case of oppression and the other in the case of mismanagement. The same situation appears to be visualised under s. 408.
8. As the court would, before making an order under s. 367 or s. 398, have to consider whether the conditions are satisfied, so too, it would appear that the Central Govt. has to find out whether a situation exists in the company, such that an order under s. 408 should be passed. It so happens that in the present case, the initial order under s. 408 appears to have been necessitated by the circumstances. No one has challenged that order before us. It was obviously a necessary order at that time. The nature of the inquiry to be made initially before passing the order in 1977 seems to be quite different from the type of inquiry that may be necessary when the question of renewal of the order is to be considered.
9. Very little reasoning is necessary to point out this difference. Initially, if mismanagement or oppression exists, or the functioning of the company is prejudicial to the interests of the company, or public interest, etc., than the conditions for passing the order are immediately established. Once the order is passed, the control of the company passes to a board appointed by the Central Govt. Now, there can be no mismanagement, there can be no oppression and there can be no functioning of the company prejudicial to the public interest or to the no shareholders of the company. This is because the control is now with the Government directors. This brings to light an interesting question as to how and in what circumstances the order is to be renewed. Either the longer exist; or the order can be renewed just as if the situation was the same as it was three years earlier. Or, some other reasons have to exist. If the fact that the order was necessary initially is enough, it would mean that the order would have to be automatically renewed every three years without end. This does not seem to be reasonable. It appears to us that the situation which has to be viewed at the time of renewing the order has to be viewed from quite a different standpoint.
10. It would be reasonable to expect that the question to be considered at this stage would be whether the removal of the Government directors would make the company revert to the situation which existed earlier, or bring about some other situation which would or could cause jeopardy in the smooth working of the company. A period of three years is a long time in the life of company, it may be that the renewal of the order may be the only solution for the problem, but it may not necessarily be the right solution. For instance, in this very case, the number of shareholders may have altered, the control of the shareholders may be different, the majority may be with a different person or different set of persons, and so on. As it seems, out of the seven shareholders-directors, four belong to the financial institutions, and so, the majority, even without the Government-directors, would be with the financial institutions, who appear also to be the largest shareholders, it is difficult to say that the "Kapadias" who were initially ousted could revert or come back to take the control of the company and even if they do, there is nothing to prevent an order being passed again under s. 408 at that stage. It is also possible for the Central Govt. to appoint a fewer number of directors, i.e., directors less than majority. Then, it may be, as made out in the case of the respondents, that it is at present essential to continue as many as eight Government directors, but they need not be appointed for three years, they can be appointed for a shorter period. In short, either the section is to be automatically operated for renewal every three years, or some sort of different inquiry is to be made at the end of three-year period, to see what new order (if any) should be passed under s. 408, and how many directors should be appointed and what should be the period of their appointment, and even, who those directors should be. This latter question could be vital because of the exercise necessary to meet a, particularly, grave situation. As the discussion is regards the general construction and interpretation of the provision it is well to keep in view the numerous situations in which s. 408 may be brought into action.
11. The peculiarity of the present case is that the financial institutions who are even otherwise controlling the board of the company fully support the appointment of Government directors. Another set of persons said to represent the "Berlias", who are one of the major shareholders, also support the Government. So, the notice to show cause was eventually issued because of the application of the financial institutions and the response to the notice was that everybody approved of the necessity for the renewal of the Government directors.
12. It may be necessary to point out that the persons who were interested in not having the renewal or having the order modified were the persons, i.e., shareholders of the company in a minority, who would be interested in seeing that the progress of the company is again placed under private management. These persons were not given any show-cause notice. It is one of this set of persons who has petitioned the court in this case.
13. It is now necessary to examine the impugned orders in some detail. The first order, which merely extended the life of the previous eight directors by one month, was passed on 7th July, 1980. The order was passed by the Company Law Board exercising the delegated powers of the Central Govt. The offer notices that the Company Law Board had received from the company a resolution of the board of directors adopted at its meeting held on 27th March, 1980, recommending that the management of the company should be continued, under s. 408, for a further period of three years. The board of directors which passed the said resolution was that board which was interested in renewing its own life. The same persons who had been appointed initially for three years in 1977 were a majority in the board which recommended that they should be appointed for a further period of three years. As argued by learned counsel for the petitioner, it is not surprising that they wanted to continue themselves for three more years and recommended this. Along with the resolution, a detailed note was sent to justify the contention of the appointment. Now, what did the Company Law Board do when it received this notice ? It sent a notice to the same directors, to the General Insurance Corporation of India, Unit Trust of India, I.C.I.C.I., and Life Insurance Corporation of India, to show cause why the directors should not be appointed for a further period beyond 10th July, 1980. Not unnaturally, none of these persons opposed the extension of the order. They were the very persons who wanted the order to be renewed. This is the reason that the petitioner moved this court with this writ petition which was filed on 7th July, 1980. In any event, the order gives a short summary of what the various directors had to say in the matter.
14. Shri Vijay Kumar Berlia, one of the directors, stated that though the directors had unanimously approved the extension for three years, he would like a personal hearing before the Company Law Board. Shri B. R. Patel, chairman of the company, stated in a letter dated 12th June, 1980, that though he agreed with the views expressed by the Board, he was of opinion that it was unnecessary to appoint a large number of Government directors. The financial institutions in a joint letter dated 6th June, 1980, supported the view that the Central Govt. Should extend the period beyond 10th July, 1980.
15. Then order continues that the Company Law Board decided to give the directors and the financial institutions a hearing. Some written submissions were sent by Shri Vijay Kumar Berlia and a rejoinder was filed by the company. Then a reply was sent to this rejoinder on behalf of Berlia.
16. The Company Law Board came to the conclusion that as the affairs of the company were not being properly conducted in July, 1977, the order had been passed in the interests of the company and its members and also the general public. The order notes that the situation in 1977 was a dismal one as far as the company was concerned. It was also noted that the market value of the shares which was Rs. 429 in 1974 had slumped to Rs. 165 in 1977. This is how the order came to be passed. It appears that some receivers had been appointed because of the actions of banks who were creditors. There was some debentures worth Rs. 244 crores which were filling due for repayment on 30th September, 1977. Because of the appointment of the new board, the institutions were persuaded to extend the life of the debentures; the banks were persuaded to withdraw the receiver and there was an improvement in the day to day management of the company. The irregularities of the previous management were investigated by the new board. It was thereafter that an appropriate legal action was taken. A first information report was filed with the police, a criminal complaint and a civil suit in Delhi against ex-directors, suits were filed against charitable trusts, etc. Thereafter, there was a great improvement in the profitability of the company. So much so that an equity dividend of 10% was paid in 1978 and special dividend in 1979 amounting to 5% plus an ordinary dividend of 20%. No doubt, as noted by the company Law Board, normalcy, had been restored in the day to day operation of the company and financial stability also. The board thought that it was necessary to have some follow-up action in connection with the matters taken up by the board. Shri Berlia had suggested in his note that though he did not object to the appointment of Government directors, he objected to the reappointment of the same directors, but the board thought that the company had thrived under the present Government directors, he objected to the reappointment of the same directors, but the board thought that the company had thrived under the present Government directors and it was absolutely essential for the further progress of the company.
17. Keeping all these questions in view, the board came to the conclusion that it was essential to continue the actions of the management to renovate and modernise the plants and to continue the litigation. Then the board thought that it was necessary to have the Government directors for three more years. At the conclusion it was stated that pending a review of the entire matter, as some personal hearings had been asked for, the board extended the life of the existing directors for one month with effect from 11th July, 1980.
18. The reasons given by the Company Law Board for continuing the life of the existing board were substantial ones. No doubt, the board and the steps taken by it had saved the company from a pretty bad situation by engendering confidence in the creditors and by the steps taken by the management, the day to day affairs of the company had improved.
19. The next order was the one passed on 6th August, 1980. This order is a short one and merely continues the order dated 7th July, 1980, for another one month.
20. The third order was one which modified the delegation made to the Company Law Board. The effect of that modification was that instead of the Company Law Board appointing the directors, the same had to be appointed by the Central Govt. The notification was published in the Gazette of India, Extraordinary, GSR 471 (E). It merely states that amount the powers retained by the Central Govt. would be the power to select the directors or additional directors. Hence, the effect of the modification would be that the company law board would have to find out whether an order was necessary under s. 408, but the actual selection of the directors would be with the Central Govt. and not the Company Law Board. The exact insertion which amended the previous notification dated 18th October, 1972, was as follows :
"Sub-sections (1) and (2) of section 408 in so far as they relate to the selection of directors or additional directors, as the case may be, of companies for appointment under the said sub-sections."
21. The final order which has been attacked in the present petition in the one passed on 9th September 1980. This states as follows :
"NOW THEREFORE, on a careful consideration of the various submissions referred to above, the Central Government in exercise of the powers conferred by ... appoints the following persons as directors of the company under section 408(1) of the Companies Act, 1956, to hold office for the remaining period from 11th September, 1980, to 10th July, 1983. ..."
22. Then follows a list of the new directors by name, who are different from the persons whose terms had been extended by the Company Law Board's orders dated 7th July, 1980, and 6th August, 1980.
23. As the law now stands, the section requires that the Company Law Board should examine the necessity of having Government directors which it did by its order dated 7th July, 1980. But that order came to an end after one month. The new order dated 6th August, 1980, did not give any reasons. The order dated 9th September, 1980, merely appoints the new directors and gives no reasons. In order to give the maximum effect to the order, we think it will be appropriate to say that the initial order giving the reasons for the extension, may be taken to be the justification for the eventual order appointing the new directors, but surprisingly the initial order did visualise a further inquiry which does not seem to have been held. This would indicate that probably it has been lost sight to that a further inquiry had still to be held as was visualised by the terms of the initial order. The following words in that order would indicate this :
"Having regard to the various oral submissions made and the voluminous written submissions received in pursuance of the personal hearing given by the Company Law Board on 28th June, 1980, to the company, Shri B. R. Patel, Shri R. N. Mehta, Shri Vijay Kumar Berlia, Shri Amer Chand Dalmia and Shri J. P. Thancker (for the financial institutions) directors of the company, which required careful examination, the Company Law Board, pending review of the entire matter in the light of such submissions, hereby appoints the following persons, being the existing Government nominated directors on the board of the company, as directors of the company to hold office for one month w.e.f. 11th July, 1980."
24. As the power to appoint for three years was then with the Company Law Board, and yet they appointed (the directors) only for one month, meant that certain circumstances did exist which had still to be considered.
25. The case which has been urged before us on behalf of the petitioner is that the per-existing conditions which existed for the purpose of passing the initial order, i.e., the order dated 11th July, 1977, were not sufficient to justify the passing of the order. We have now to read the reasons given in the order dated 7th July, 1980, with the order dated 9th September, 1980. If we treat the first as the order giving the reasons and the second as the order appointing the directors, we would find that there are two reasons for passing the order under s. 408. Firstly, that the working of the order passed in 1977 had brought about a great improvement which necessitated the continuance of the board. Secondly, that the improvements and expansions made by the Government-controlled board necessitated a continuance of the same board and some litigation and follow-up action was also to be continued. All these reasons lead to the inference that the same board which was appointed in 1977 should continue as their working was half done. The Company Law Board did not take into account the necessity for changing the members of the board of directors and continued the same persons. However, the Government directors appointed by the Government itself by the order dated 9th September, 1980, are a completely different set of persons. Of course, there may be other reasons to justify a change in the membership of the board, but the very fact that a new set of persons had been appointed which is totally different, seems to suggest that the reasons given by the company Law Board for continuing the board were not the ones that were taken into account by the Central Govt. We are deciding this petition on this basis, but it is well to see that the petitioner's submission that reasons which are not germane to the section and reasons which are not germane to the final order were the ones that weighed with the Company Law Board. We now take up the submissions of the parties in relation to this case.
26. It was contended on behalf of the respondents that the petitioner had no locus standi to move this petition. This contention was based on the submission that the petitioner represented a very small section of the shareholders. It was stressed that the petitioner was not a person who could be aggrieved in any way by the order passed by the Central Govt. It is quite correct, and we would have upheld this objection, if the company was functioning under its ordinary board and there were not majority of Government directors. An order when initially passed under s. 408 would require a notice to the company. The company's board of directors would fully represent all the shareholders. However, that board is itself dominated by a majority of Government directors, so this principle cannot apply. The board then represents the Government directors who are interested in continuing in office. The four financial institutions' directors in this case were themselves representing the parties who wanted the order to continue as they had made an application to the Company Law Board. For various reasons, we need not go into it. Shri Vijay Kumar Berlia who represented the "Berlia group" and was a major shareholder was also interested in the continuance of the Government directors. His learned counsel, Mr. Cooper, has more or less conceded this position before the court. Therefore, there was practically no one among the board of directors who could at all oppose the order for continuance of the Government directors, rather these persons were all interested in the order being renewed for three more years. This left only the shareholders. Can it be said that a shareholder who owns part of the equity capital of as company is not interested in the company ? The petitioner can apply for a winding-up of the company. He could with the support of other shareholders apply to the court under s. 397 or s. 398. The petitioner is the owner of 1,100 equity shares of a total value of Rs. 1,10,000. He is obviously a person interested in the prosperity of the company being part owner of the company. Normally, he could not be given any hearing, but, in the circumstances of this case, he, and other shareholders who might be interested in the Government directors being discontinued may be interested that the majority control should not be with the Government directors, has the right to represent his point of view. We, therefore, are of the view that the petitioner does have locus standi at the stage when the order was to be renewed, though he may have no right or locus standi when the initial order was to be passed because his interests were secure in the hands of the elected board of directors. There may be some situations when even the elected board may not be able to represent the share-holders properly, in which case a shareholder might have in some situations a locus standi to move the court. However, in the situation which exists in this case, we do think that the petitioner has locus standi to move this court. The shareholding of the petitioner in M/s. National Rayon Corporation Ltd. is a valuable property, the market price of which is dependent on how the said company functions. He is, therefore, interested that the company should work to its maximum potential, and so, he is interested in the type of order that can be passed under s. 408, because the way in which the company is to work has to depend largely on the type of management that the company has. He may be able to urge that if the company reverts to private management, then the further of the company may be better or its working may improve even more than is possible under a Government controlled board operating. We now proceed to deal with the contentions raised by the petitioner.
27. It was urged that the order under s. 408 of the Companies Act is ultra vires of that section because the necessary pre-conditions for passing the order do not exist as at present. It was further contended that the order had been passed on irrelevant considerations not germane to the section. In fact, it was submitted that relevant matters were not taken into consideration at all by the company Law Board. It was further urged that no inquiry was made and it was a mere pretence of an inquiry because only those persons were heard who were seeking an order extending the life of the Government directors. It was further submitted that the order was passed contrary to the rules of natural justice and fair-play. On this part of the case, it was urged that the order was quasi-judicial in nature and some hearing was necessary. The hearing in this case had to be of shareholders who opposed the renewal of the order and not of those persons who supported it. It was stated that there was a request by the petitioner through his advocate. Annexures P-3 and P-4 to the petition are a telegram and a letter requesting that an opportunity be given to the petitioner for representation and oral hearing. Both of them are dated 3rd July, 1980. In the letter the petitioner's advocate had submitted that the financial institutions and the "Berlia group" had connived together with the Government directors to continue their hold on the company, and, therefore, an opportunity should be given to the petitioner to represent the views of the unrepresented shareholders. It was further submitted that there was ample time to invite all representations and s. 640B(2) of the Companies Act was referred to, saying that when an application was made of the Central Govt. under s. 408, a notice had to be given to the shareholders also. Lastly, it was contended that the order was mala fide. There were the submissions in relation to the July order passed by the Company Law Board.
28. There were some other contentions in respect of the September order. It was submitted that the reasons supporting the July order could not support the order eventually passed by the Central Govt. The order passed in September had to be justified for other reasons which did not appear in the face of the order. It was further submitted that the amendment withdrawing the delegation from the Company Law Board to the Central Govt., i.e., the withdrawal of the powers of appointment of directors, was bad in this case. It was bad because the reasons for passing the order could not be disassociated from the persons to be appointed under the order. It was submitted that the rules of natural justice require a de novo hearing by the Central Govt. because the initial order which was passed for one month had already expired. This submission amounts to this : The initial order passed in 1977 expired in 1980 and required a further inquiry before an order could be passed. The second order passed in July, 1980, was passed only for one month at which time it had expired. A new order was visualised but that necessitated a further inquiry which was never held. Therefore, the final order passed in September by the Central Govt. was not supported by any reasons at all nor was there any hearing before that order was passed. A further corollary to this argument would be that the Central Govt. would also have to give a hearing because the order appointing the directors was passed by the Central Govt. under s. 408. It was also pointed out that it was inconsistent for the hearing to be by one party and the order to be passed by another party. It was further submitted that oral and written submission should have been invited by the Central Govt. before the passing of the order. Finally, it was submitted that the order passed in September exercises the totality of the power visualised by s. 408, which was the appointment of directors, and if this power was not with the Company Law Board, then the whole matter had to be dealt with by the Central Govt. and not by the Company Law Board.
29. There are some indicate points involved in the submissions relating to the September order. We will not examine them in any greater detail because of the order we have eventually decided to pass, but some reference to the same will have to be made in the course of this judgment.
30. As far as the respondents were concerned it was contended that once a power was exercised under s. 408, then the question to be considered at the time of renewal of the order was basically connected with the situation which existed earlier. It was a question of finding out whether there was a necessity to continue the order of not to continue the order. Once it was found that the order under s. 408 had worked well and some work which had been undertaken by the Government controlled management was unfinished, them the conditions for passing the order under s. 408 existed because it was a question only of continuance.
31. It is necessary at this stage to deal with the main judgment cited on behalf of the respondents to support the plea that the petition is without foundation. Reference was made to Kamal Prasad Khetan v. Union of India , in which case the validity of an order passed under s. 18A(1)(b) of the Industries (Development and Regulation) Act, 1951, was examined by the court. The relevant section permitted the taking over of the management of the whole or any part of the undertaking for a period not exceeding five years as may be specified in the order. There is a proviso to the section which states that even after five years the period could be extended by the Central Govt. in public interest. It so happened that the order initially passed on 8th November, 1955, took over the management of Ishwari Khetan Sugar Mills Ltd., Lakshmiganj, for only one year. On 7th November, 1956, the order was altered by a notification which stated that the words "one year" would be substituted with the words "two years". It was contended on behalf of the petitioner under art. 32 of the Constitution, that the necessary pre-conditions for passing the second order were not satisfied. The court held by a majority judgment that one an investigation revealed the necessity of the order, the conditions continued to exist, and, therefore, the order was passed on the same conditions as the initial order. In the case before the court, both the initial order as well as the second order were challenged. It was held by the court that there was sufficient material with the Central Govt. to justify the passing of the order on the ground that the industrial undertaking in question was being run in a manner highly detrimental to public interest. On the question of renewal of the order, the contention was that after the initial period of five years had expired, the Central Govt. could continue the order in the public interest and a copy of the direction had to be laid before both Houses of Parliament. Therefore, the continuance was wrong. The court rejected this on the footing that the original order was only for one year and the amending order only continued it for another year (i.e., it was within the period of five years). The court, however, came to the conclusion that s. 21 of the General Clauses Act, gave the power to the Central Govt. to add, amend, vary or reasoned any notification and the alteration of the period of one year to two years could be exercised in a like manner as the original order. Therefore, the renewal of the order was a good one. It was further held that the order was not mala fide. The minority judgment by Sarkar J., reached the same conclusion, but in a different way. It also observed that the amendment made under s. 21 of the General Clauses Act, could only extend the period up to five years. The contention of the learned counsel made in that case, which was rejected both by the majority and the minority view was that it could not be stated at the end of the first order that the management of the industrial undertaking existed because the same had versed in the Controller appointed by the Government. It was held in both the judgments that the power under s. 21, could be exercised on the basis of the material existing at the time of the original order.
32. We are of the view that this judgment does not apply to the facts of the present case. As the section stands, the directors can be appointed for three years. If they are appointed for a period shorter than three years, it may be that under s. 21 of the General Clauses Act, their period can be extended up to the period of three years. However, when three years expired, then the original order of appointment comes to an end by elapse of this statutory period. After that, the Government has to pass new order and it can also do so only under the powers given by the section, which means that such inquiry as thought fit had to be held and the necessary preconditions visualised by the section have to exist.
33. We do not agree with the learned counsel for the petitioner that mis-management by the Government directors or oppression by them, etc., has to exist. That would totally nullify the effect of the section. The way we read the section is that it visualises the passing of an order under s. 408 on the existence of certain preconditions. If those preconditions exist, then the order can be passed. When the period of three years elapses, then the initial conditions have been brought under check by the passing of the order under s. 408, so that they cannot come to life again. At that time, what has to be seen is whether those pre-existing conditions could come to life again. For the purpose of this argument, it may be necessary merely to repeat that the wording of the section is :
"that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is a prejudicial to the interests of the company or to public interest."
34. The under-lined portion of the section shows that the object of the order is to prevent this situation. The initial order has already prevented this situation. Now when the order comes to an end, the situation may resuscitate - may be re born or may take come other shape. If it is still necessary to pass an order to prevent a situation arising, then an order can be passed. The main point of the exercise, is that act of prevention. You can either prevent something which already exists by bringing it to an end or, you can prevent something which is likely to come about if you do not take action. Therefore, it is not absolutely essential that mismanagement or oppression, etc., should exist at the time the order is to be passed. If such mismanagement, oppression or working of the company in a manner prejudicial to the interests of the company or to the public interest is likely unless an order is passed, then the order can be passed notwithstanding the non-existence of the situation on the date on which the order is passed. The section works in a preventive manner. It prevents a situation coming into being which would be bad for the company, the members of the company or the public interest, etc. This is the type of situation which should exist at the time when the order has to be renewed.
35. The Company Law Board in its reasons analysed the series of events which had necessitated the original order and also showed that the order passed in 1977, has saved the situation. It thought that the order should be continued so that the goods work could be continued. This may not be what is stated in the section, but the effect of the order is to show that the existing order as passed in 1977, had worked to prevent mismanagement of the affairs of the company and had worked to prevent mismanagement of the affairs of the company and had improved the financial position and profitability of the company. The order did not say this situation will re-arise, but this seems to be inherent in it. What the Company Law Board did not do was to ask for the opposite opinion. If other shareholders had been heard, possibly they would have satisfied the Company Law Board that there was no risk of oppression or mismanagement and no possibility in the affairs of the company being conducted in a manner prejudicial to the shareholders or the interests of the company. In fact, these shareholders might very well have shown that it would be advantageous to the company to revert to private management. They could have said that the financial situation was such that the company would undertake some other business or undertake some other works or, take advantage of the economic situation in regard to the growth and expansion of the company which was not possible under a Government Controlled Board. But, the point for consideration is whether such a hearing should have been denied to the petitioner. It may be that the contentions of the petitioner might have been rejected, or the petitioner could not show anything to justify a variation of the order or show that no order was necessary at all, etc. But, by denying to hear the petitioner the Company Law Board has in fact shut its mind to an aspect of the case which appears to be quite fundamental to the question as to whether the order should be renewed, and if so, as to what type of order should be passed.
36. It was urged before us that on the basis of the judgment of the Full Bench of this court in Swadeshi Cotton Mills Co. Ltd. v. Union of India, 2nd (1979) 2 Delhi 387, it was not necessary to hear the petitioner on the principle of audi alteram partem. The order passed in that case was under s. 18AA(1)(a) of the Industries (Development and Regulation) Act, 1951. The situation for passing that order and the conditions are quite different from the order which has to be passed under s. 408 of the Companies Act. It may be mentioned that the judgment of the Full Bench has been reversed by the Supreme Court . The other judgment on this question was also delivered in re an order under s. 18AA, namely, Vijay Kumar Mundhra v. Union of India 2nd [1972] 2 Delhi 483 [FB], does not now appear to lay down the correct law. In that case, it was held that no hearing was necessary at all as the rule of natural justice was not involved. We are of the view that these two Full bench judgments do not apply to the facts of the present case.
37. However, we are still left with the question as to who should be heard. If we hold that all the shareholders of the company are to be heard, we would be doing injustice to the provisions and possibly make the section unworkable. We are, therefore, of the view that, in normal circumstances, the company is to be heard through the shareholders-directors who ordinarily represent all the shareholders. In this particular case, because it was brought to the notice of the Company Law Board that the directors were anxious to continue the order regarding the Government directors, some shareholders who wanted to represent against the order should also be heard. Representations could be invited from the shareholders and if there was anything important that could be said in the matter, then some personal hearing should have been allowed to representative shareholders opposed to the passing of the order renewing or continuing those appointment of the Government directors for a further period of three years. In this way, the petitioner could have had a hearing and he could have represented those aspects and considerations which have been brought to light before us which would have helped the Company Law Board to decided whether the order should be renewed and for what period and in what way.
38. In this connection, it is necessary now to refer to another decision relating to this very company which is to be found reported as Baldevdas R. Raheja v. Union of India [1977] Bom LR 581, decided by Rege J.
39. It was held in that case that the powers of the Government under s. 408 were of an urgent and emergent nature and it would be difficult to hold an inquiry of the type contended for by the petitioner. We are in full agreement with that judgment. At that time, the power of the Government was to appoint two directors had only two directors had been appointed to the board. Moreover, there were two warring groups of directors, namely, "Kapadia group" and "Chinai group". There were a number of difficulties in the working of the company due to those two groups, which led the Company Law Board to suo motu initiate proceedings under s. 408 for the appointment of Government directors. Show-cause notices were issued to the company, the Chinai group and the Kapadia group. The company did not oppose the action; the Chinai group welcomed it, but the Kapadia group opposed the action alleging that there was mismanagement by the Chinai group. This led to the appointment by the Company Law Board of Shri T. A. Pai and Shri K. C. Raman. Later, Shri Pai became a Minister in the Central Cabinet, and so Shri H. M. Trivedi, became a director. The learned judge held that there was sufficient material before the Company Law Board to pass the order and he elaborately dealt with the facts of the case. One of the points dealt with by the court was whether every shareholder had to be given an opportunity of being heard. The judge rightly held that in the circumstances, the Company Law Board was, in observing the principles of natural justice not bound to give every shareholder an opportunity of being heard. We completely agree with this view. We would have held that even the present petitioner is not bound to be heard except in the peculiar circumstances in this case.
40. The rules of natural justice require a hearing so that a point of view can be placed before the adjudicating authority. It so happens that the point of view of the petitioner cannot be placed by anybody else, so the rules of natural justice would be attracted in the present case and those order would be bad because of the denial of a hearing to the petitioner. At the time the initial order was passed in 1977, there would have been no question of allowing the petitioner a hearing, but due to the alternation of the circumstances, the petitioner had become entitled to be heard.
41. It now remains for us to decide what are the consequences of this conclusion. We need not examine the other contentions further though it may be mentioned that reliance was placed on Rohtas Industries Ltd. v. S. D. Agarwal , in which case an order passed by the Central Govt. under s. 235 of the Companies Act, 1956, was examined and on Rampur Distillery and Chemical Co. Ltd. v. Company Law Board. , in which case an order passed by the Central Govt. under s. 326 of the Companies Act, 1956, was examined. In both the cases, the order passed by the Government was examined to see whether the relevant conditions existed. In Rohtas case it was held that though the Central Govt. had to find the circumstances which were pre-conditions, the existence of the circumstances was open to judicial review. In that case, it was found that the necessary preconditions did not exist. In Rampur Distillery's case, the judgment of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board , as well as in Rohtas Industries' case just referred to, were referred to, as well as the judgment in Nakkuda Ali v. Jayaratne [1951] AC 66 (PC). It was observed by the court as follows (at p. 926 of 40 Comp Cas) :
"...... the High Court is not constituted a Court of Appeal over the judgment of the Board. The court has merely to consider whether in arriving at its decision the Board has restricted itself to the enquiry contemplated to be made and has taken into consideration all the relevant circumstances and that its decision is not vitiated by irrelevant or extraneous matters."
42. The court then held that the High Court was right in determining whether Govan Brothers were fit and proper persons to be re-appointed as managing agent and its past conduct and dealings had to be taken into account.
43. Having set out the propositions for consideration, we think we are not in a position to adjudicate on the correctness of the Company Law Board's decision because the order can both the justified as well as not justified. If all the relevant material is taken into consideration, then we are not to sit in appeal over the decision of the Board. We are of the of the view that all the material has not been taken into consideration because the point of view of the petitioner and shareholders like him has not been taken into consideration. So the order has to be quashed.
44. It is now necessary to yet deal with another aspect of the case. The modification of the power under s. 408 has resulted in the power to select the directors being taken away from the Company Law Board and it is now with the Central Govt. In practice, this means that the Central Govt. has only to select the personnel, i.e., the persons to be the directors. It is the board which is to decide how many directors are to be appointed and for what period. In this case, the number of the directors as well as the period has been decided by the Central Govt. This seems to be contrary to the delegation now remaining with the Company Law Board. In this connection, the notification can be produced for ready reference. The new insertion is :
"Sub-sections (1) & (2) of section 408 in so far as they relate to the selection of directors or additional directors, as the case may be, of companies for appointment under the said sub-sections."
45. So, the only power with the Central Govt. is the power of selection. The other power in the section is the selection of the number of directors who have to be appointed and the period for which they have to hold office. It appears, therefore, that the Company Law Board will have to pass an order specifying the number of directors as well as the period for which they have to hold officer and the Central Govt. has to select the persons. This disposes is one of the arguments that the Company Law Board had recommended the continuance of seven directors, but the Central Govt. has appointed eight directors.
46. In view of the order we propose to pass, it will be open for the company Law Board to recommend any number of directors that it thinks necessary.
47. In view of what we have concluded, we come to the conclusion that the order of the Company Law Board has to be quashed in this case and also the consequential order of the Central Govt. We would, however, say that it is open to the Company Law Board to pass a fresh order under s. 408 after hearing the petitioner, to the extent thought necessary, and also the other shareholders who may wish to oppose the continuance of Government directors on the board. For this purpose, the Company Law Board may invite representations and give an oral hearing to the extent that may be thought necessary. We make it clear that the section does not visualise the hearing of all the shareholders, but it does visualise a representation and hearing in the particular situation which exists in this particular company.
48. As some time is bound to elapse before such representations can be obtained and actual hearing granted, we have now to decide what to do with the order in the meantime although we have quashed the same. It was held in Union of India v. Swadeshi Cotton Mills Co. Ltd. , by the Supreme Court that an order staying the operation of the order of the Company Law Board, could not be justified. The reason for this was that the order of the specialised body like the Company Law Board should not be interfere with at an interlocutory stage. We have come to the conclusion that the order has to be struck down, but we have to make some interim arrangement for the running of the Company till a fresh order passed. We are not in a position to make any interim arrangement about the company. We have, therefore, decided to suspend our order quashing the appointment of respondents Nos. 22 to 29 for a period of six months in order to enable the Company Law Board and the Central Govt. to pass a fresh order. Hence, notwithstanding the grant of the writ prayed for by the petitioner, we would direct that respondents No. 22 to 29 may continue to act as directors of the company for a period of six months to enable further orders being passed. We have suspended the operation of the writ granted by us for this period, so that the affairs of the company need not be jeopardised, as may happen, if our order comes into effect immediately. This result is that the petition is allowed and the petitioner will get his costs.