Modi Industries Ltd. vs Union Of India And Others
1980 Latest Caselaw 167 Del

JUDGMENT

D.K. Kapur, J.

1. The petitioner-company is a public limited company which was originally known as Modi Sugar Mills Ltd., but at present it carries on business of various types, i.e., sugar, vanaspathi, steel, electrodes, lantern, gases, distillery of soap. The balance-sheets for the years 1971-72 to 1975-76 which are no record show that the share capital is more than Rs. 2.5 crores and there are reserves in the neighborhood of Rs. 3 crores. The petitioner has challenged an order issued on 12th May, 1977, by the Company Law Board which reads as follows :

"No. 2/4/77-CL. I

Government of India,

Ministry of Law, Justice & Company Affairs,

Department of Company Affairs,

(Company Law Board)

Shastri Bhavan, 'A' Wing, 5th Floor,

Dr. R. P. Road,

New Delhi-110001

12-5-77

ORDER

WHEREAS in the opinion of the Company Law Board there are circumstances suggesting that the persons concerned with the management of the company named as Modi Industries Limited having its registered office at Modinagar District, Meerut, Uttar Pradesh (hereinafter referred to as the company) have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company/or its members :

AND WHEREAS the Company Law Board is further of the opinion that inspectors should be appointed to investigate into the affairs of the company.

NOW, THEREFORE, in exercise of the exercise of the powers conferred by clause (b) of section 237 of the companies Act, 1956 (Act 1 of 1956), read with section 10E(1) of the said Act, and the notification of the Government of India in the Department of Company Affairs. No. G.S.R. 443 (e) dated the 18th October, 1972, the Company Law Board hereby appoints S/Shri Jagdish G. Wadhwan, Amolak Lal Bajaj and Harish Kumar, Chartered Accountants, C/o. M. Pal & Company, 4850/24, Ansari Road, New Delhi-2, as inspectors to investigate into the affairs of the company and to report thereon pointing out all the irregularities and contraventions of the Companies Act, 1956, and/or any other law and the person or persons responsible for such irregularities and contraventions.

2. The Inspectors shall investigate into the affairs of the company in respect of the years 1971-72 to 1975-76 and complete the investigation and submit six typed copies of their report to the Company Law Board on or before 31st December, 1977. The Company Law Board hereby reserves the right to extend the above-mentioned date from time to time and when considered necessary.

3. The Inspectors shall be entitled to a consolidated remuneration of 70,000 (rupees seventy thousand only) and other incidental out of pocket expenses actually incurred.

By order of the Company Law Board

Sd. N. L. Pillay        

Under Secretary to the Company law Board.

No. 2/4/77/CL. I.       

Copy forwarded to :-

1. Shri Jagdish C. Wadhwan

C/o. M/s. M. Pal & Co.

4850/24, Ansari Road,

New Delhi-2.

2. Shri Amolak Lal Bajaj

3. Shri Harish Kumar

4. M/s. Modi Industries Limited, Modinagar,

District Meerut, Uttar Pradesh.

-

5. Regional Director, Company law Board,

Kanpur

6. The Registrar of Companies, Delhi.

7. File No. 3/15/76-CL-I Branch.

8. CL. II Branch

9. Guard File.

Sd. N. L. Pillay        

Under-Secretary to the Company Law Board."

2. The said order was issued under s. 237 of the Companies Act, 1956, which gives the Central Govt. considerable powers to order the investigation into the affairs of a company for particular purposes. The said section also gives to the court power to order the investigation into the affairs of the company. There are three ways in which the power under s. 237 can be invoked. The company may pass a special resolution to that effect or the court may order the same. In such cases there is no restriction to the power being exercised, but in the case of the Central Govt., the poser is circumscribed by s. 237(b) which shows that the Central Govt., the power is circumscribed by s. 237(b) which shows that the Central Govt. can order the investigation only if there are circumstances suggesting either that the business of the company was being conducted with intent to defraud its creditors, members or any other persons, or otherwise for unlawful purposes, etc., or that the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct or that members of the company have not been given information which they might reasonably expect and so on. In the present case, the opening words of the order show that the opinion of the Company Law Board was that there are circumstances suggesting that persons connected with the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company or its members. The order moreover provides that the persons appointed to carry out the investigation have to look into the affairs of the company and make a report pointing out all irregularities and contraventions of the provisions of the Companies Act or any other law, and also, the person or persons responsible for such irregularities and contraventions. It is contended before us that the order merely sets out the words of the section and does not point out the circumstances that might have come to the notice of the Company Law Board. Also, the report required from the chartered accountants appointed to carry out the investigation is concerned with the irregularities and contraventions of the Companies Act, 1956, and other law, which means the investigation is not limited to fraud, misfeasance or misconduct.

3. A large number of cases have been brought to our notice concerning the manner in which the courts have examined orders opposed by the Central Govt. and the Company Law Board under s. 237 of the Act. The leading judgments on this point have been referred to us. They are, Barium Chemicals Ltd. v. Company Law Board and Rohtas Industries Ltd. v. S. D. Agarwal . In each case, the Supreme Court had occasion to examine the manner in which s. 237 of the Act is to be applied to a given set of facts. In addition, there is a comparatively recent unreported judgment of this court where a Division Bench has examined a petition similar to the one before us which is Ashoka Marketing Ltd. v. Union of India, Civil Writ Petition No. 918 of 1974, decided on 26th April, 1978, since reported in [1981] 51 Comp Case 634 (Delhi).

4. In has been pointed out by learned counsel for the petitioner that in all these three cases the order passed under s. 237 by the Central Govt. was quashed on the ground that circumstances did not exist which would suggest that any person connected with the management had been guilty of fraud, misfeasance or misconduct.

5. The procedure of law laid down in these three judgments have been pointed our to us and it has been stressed that the circumstances which may give rise to the opinion are not only to be subjectively determined by the person or persons expressing the opinion, but must also be objectively shown to exist. It has been stressed before us that we should examine the existence of the circumstances as claimed in the affidavit filed on behalf of the respondents and also the explanation given in the affidavit filed on behalf of the petitioner in reply to the said affidavit.

6. As it happens, the counter-affidavit of Shri N. L. Pillay, Under-Secretary of Law, Justice and Company Affairs, has been filed in reply to the petition, but later another affidavit, being the affidavit of Shri S. Balaraman, Under-Secretary, Government of India, Ministry of Law, Justice and Company Affairs, has been filed which is dated 4th December, 1979. The first affidavit was lied on 29th October, 1977; it did not give any particular material in regard to the question whether circumstances existed. Probably, that is why the second affidavit had to be filed. The affidavit of Shri S. Balaraman is, therefore, the one to be considered regarding the circumstances which warranted the passing of an order under s. 237 of the Act. This affidavit refers to the circumstances under several heading : (1) working of the steel unit, (2) working of gas and Chemical units, (3) working of distillery unit, (4) working of sugar unit, (5) working of vanaspati unit, and (6) working of soap unit. The purpose of this affidavit is to bring to the notice of the court that there are certain circumstances specifying malpractices.

7. In reply to this, a rejoinder affidavit dated 14th January, 1980, has been filed, which is the affidavit of Shri A. K. Jain, Company Secretary of the petitioner-company. This is a detailed document referring to a number of facts, the object of which is to show that the circumstances alleged to exist do not in fact exist, or at least the circumstances are quite different from that are alleged to exist. As we are to follow the procedure followed in the three judgments referred to, it may be now useful first to state the legal position which emerges from the judgments.

8. In Rohtas Industries' case , the order is reproduced at p. 785 (p. 709 of AIR) of the report. It seems to be exactly in the same terms as in the present case. An affidavit being the affidavit of Shri Rabindra Chandra Dutt, Secretary to the Govt. of India, Ministry of Finance, Department of Company Affairs and Insurance, and Chairman, Company Law Board, was filed in opposition in the Patna High Court. In this affidavit, reference was made to the report of the Commission of Enquiry headed by Justice Vivian Bose dated 15th June, 1962, and certain complaints received by the department concerning the misconduct of the management. It is noteworthy that the Patna High Court had dismissed the writ petition on the ground that it was not open to judicial review and the opinion of the Central Govt. was conclusive. However, in view of the judgment in the Barium Chemicals' case [1966] 36 Comp Case 639 (SC) and on an interpretation of the law, the Supreme Court went into the allegations, particularly the circumstances relating to certain transactions. It was concluded that the investigation in question would not have been ordered except for the fact that Shri S. P. Jain was associated with the company. On the legal question, it was held as follows (p. 800 of 39 Comp Cas) :

"Coming back to section 237(b), in finding out its true scope we have to bear in mind that section is a part of the scheme referred to earlier and, therefore, the said provision takes its colour from sections 235 and 236. In finding out the legislative intent we cannot ignore the requirements of those sections. In interpreting section 237(b) we cannot ignore the adverse effect of the investigation on the company. Finally, we must also remember that the section in question is an inroad on the powers of the company to carry on its trade or business and thereby an infraction of the fundamental right guaranteed to its shareholders under article 19(1)(g) and its validity cannot be upheld unless it is considered that the power in question is a reasonable restriction in the interests of the general public. In fact the vires of that provision was upheld by a majority of the judges constituting the Bench in Barium Chemicals' case , Principally on the ground that the power conferred on the Central Government is not an arbitrary power and the same has to be exercised in accordance with the restraints imposed by law. For the reasons stated earlier, we agree with the conclusion reached by Hidayatullah and Shelat JJ. in Barium Chemicals' case that the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (i) or the persons mentioned in sub-clause (ii) were guilty of fraud or misfeasance or other misconduct towards the company or towards any of its members is a condition precedent for the Government to form the required opinion and if the existence of those conditions is challenged, the courts are entitled to examine whether those circumstances where existing when the order was made. In other words the existence of the circumstances in question are open to judicial review by the courts. As held earlier, the required circumstances did not exist in this case."

9. The court then considered whether any reasonable authority, much less and expert body like the Central Govt., could have made the impugned order on the basis of the material before it and came to the following conclusion (p. 801 of 39 Comp Cas) :

"We do not think that any reasonable person, much less any expert body like the Government, on the material before it, could have jumped to the conclusion that there was any fraud involved in the sale of the shares in question. If the Government had any suspicion about that transaction to should have probed into the matter further before directing any investigation. We are convinced that the precipitate action taken by the Government was not called for nor could be justified on the basis of the material before it. The opinion formed by the Government was a wholly irrational opinion."

10. The judgment in the other Supreme Court case, Barium Chemicals Ltd. , which is earlier, proceeds on an even more detailed examination of the law and come to the conclusion that the opinion to be formed must be based on circumstances and moreover the law required that the existence of the circumstances much be demonstrated, as held by Hidayatullah J. at p. 661 (p. 309 of AIR) of the report :

11. An action, not based on circumstances suggesting an inference of the enumerated kind will not be valid. In other words, the enumeration of the inferences which may be drawn from the circumstances, postulates the absence of a general discretion to go on a fishing expedition to find evidence. No doubt the formation of opinion is subjective but the existence of circumstances relevant to the inference as the sine qua non for action must be demonstrable. If the action is questioned on the ground that no circumstances leading to an inference of the kind contemplated by the section exists, the action might be exposed to interference unless the existence of the circumstances is made out. As my brother Shelat has put it trenchantly :

'It is not reasonable to say that the clause permitted the Government to say that it has formed the opinion on circumstances which it thinks exist .....'

12. Since the existence of 'circumstances' is a condition fundamental to the making of an opinion, the existence of the circumstances, if questioned, has to be proved at least prima facie. It is not sufficient to asset that the circumstances exist and give no clue as to what they are because the circumstances must be such as to lead to conclusions of certain definiteness. The conclusions must relate to an intent to defraud, a fraudulent or unlawful purpose, fraud or misconduct or the withholding of information of a particular kind. We have to see whether the chairman in his affidavit has shown the existence of circumstances leading to such tentative conclusions. If he has, his action cannot be questioned because the inference is to be drawn subjectively and even if this court would not have drawn a similar inference that fact would be irrelevant. But if the circumstances pointed our are such that no inference of the kind staged in s. 237(b) can at all the drawn that action would be ultra vires the Act and void."

13. This quotation would show that there has to be an objective demonstration of the circumstances, but if the circumstances are shown to exist then the question whether the opinion is rightly or wrongly formed is not the subject of judicial review.

14. The same view has materially been adopted by the Division Bench of the Court in deciding Ashoka Marketing Ltd.'s case [1981] 51 Comp Case 634.

15. These is another case decided by myself, S. L. Verma v. Delhi Flour Mills Co. Ltd. [1975] 45 Comp Case 33 (Delhi), where it has been pointed out that even the court has to be careful when applying its power under s. 237 although there is no apparent limit in the section.

16. Having now stated the manner in which the court is to act, it is necessary to examine the facts of the case with a view to determining whether circumstances do in fact exist which could lead to the formation of the opinion. In order to examine the affidavits filed in the case setting out the circumstances that are said to exist, it is also necessary to the quite clear as to for what purpose these affidavits are being examined. No doubt, we are to examine the existence of certain circumstances. But, what are those circumstances ? It is interesting to note that from the very beginning legislation regarding companies has been directed towards the prevention of certain evils, which came into existence, almost simultaneously with the great rise of private financial enterprises or business corporations. The great success of the East India Company had been followed by the South Sea Company in the latter part of the 17th Century. The South Sea Company had proved to be fraudulent venture described as a company for scheming rather than trading. The Bubble Act, 1720, was the first positive legislation to suppress the formation of companies formed as mere ingenious legal devices for deceiving the public. On the other hand, too much control over the formation of companies would also affect capital formation and floatations for innocent purposes, so a great deal of legislation has resulted. As the Companies Act in India is largely based on the English Companies Act, it would not be out of place here to mention that s. 237, as it now exists in the Companies Act, 1956, is practically the same as s. 165 of the English Companies Act, 1948. The subsequent sections dealing with the powers during investigation, the production of documents and the proceedings and report of the inspectors are also more or less the same. In English, the power to direct can investigation is given to the Board of Trade. The same principle has been applied in India by giving the power to the Company Law Board, though in the Act it is stated to be power of the Central Govt.

17. It may be pointed out that before 1948, the Companies Act did not make any provision in England for ordering an investigation into the affairs of a company. In fact, the history of company law legislation shows that the original doctrine of economic liberalism and laissez fairs has gradually vanished so as to permit the public being protected from fraud and exploitation. There was a time when the court would not interfere in disputes between shareholders and would leave the determination of the rights of shareholders entirely to the brute majority as represented by majority shareholders. This has all been altered in various ways. Sections 397 and 398, as they now exist in the Act, enable the court to protect minority rights. Ample powers to prevent the misuse of the company's funds against the public interest or to prevent mismanagement and other evils now exist.

18. Nevertheless, it cannot be denied that corporations are run in such a way that it is difficult for a small shareholder or for the persons belonging to the public getting inside information as to the actual manner in which the funds collected from the public are being employed by the persons who are in-charge of the management of the company. As at present, there are several powers available to various authorities under the Act in addition to those granted to the company court to protect the interests of the shareholders and the general public.

19. Under s. 209 of the Act, accounts have to be kept by a company in a particular manner. Those accounts are open to inspection by a director during business hours. The account books have to be preserved along with the vouchers relevant to each entry in good condition for a period of not less than eight years. Under s. 209A the books of account and other papers of the company are open to inspection during business hours by the Registrar of Companies or by an officer who is specially authorised by the Central Govt. in this behalf. Such an inspection can be made without giving any notice to the company concerned. Great powers are given to the person making an inspection under this section. He can take copies of books of account and other books and papers; he can use the power of a civil court for discovery and production and can examine on oath. There are penalties provided if the company makes default in complying with the directions given in the inspection. If a director or officer of a company is convicted of an offence under the section, he vacates his office and is disqualified for a period of five years. This section came into effect from 1st February, 1975.

20. In addition, a company is to disclose its annual accounts and balance-sheet at a general meeting as provided by s. 210, et seq. Auditors have to be appointed who examine the books of account of a company for the purpose of audit and the nature of the report is specifically provided for in the Act.

21. In addition to his protection of the shareholders by and through audit of the accounts by a chartered accountant, the Central Govt. has the power under s. 233A to order a special audit in certain cases. This section shows that the Central Govt. can order a special audit when the affairs of the company are not being managed in accordance with sound business principles, etc., or a company is being managed in a manner likely to cause injury or damage, etc., to there business, or the financial position of the company is in danger. Under s. 233B, a cost accountant can be appointed. These provisions were introduced in the Act in 1960 and 1965, respectively. In addition to this, there is the power to order investigation under s. 237 with which we are concerned.

22. This introduction is not out of place in the circumstances of the present case because the facts show that in the present case in January, 1971, an order was passed by the Company Law Board under s. 209(4) appointing Shri Suresh Behari to inspect the books of account and other papers of the petitioner-company. According to the petitioner, nothing was revealed by this special inspection.

23. On 24th January, 1973, the Company Law Board issued a notice under s. 233A, which appears an annex. B to the petition. It states that an inspection of the books and records of the company had been made under s. 209A(4) and according to that inspection certain transactions had taken place which showed that the company was not being managed in accordance with sound business principles and prudent commercial practices. A large number of allegations regarding alleged malpractices was set out in this document but the same need not mentioned in extenso.

24. In reply to the show-cause notice a detailed reply was given which is annex. C. This reply was considered by the Company Law Board and the petitioner-company was represented by an advocate, Shri G. S. Shah. Eventually, in May, 1974, the Central Govt. decided that no special audit was necessary.

25. It is then stated in the petition that a further inspection of the books of account and other books of the company was made for the period January, 1975, to May, 1975, and all information required by the inspector was supplied. Nothing more was done as a result of this inspection till the notice was issued on 12th May, 1977, which relates to the period covered by the years 1971-72 to 1975-76, which would also appear to be the period covered by the inspection made by the inspectors under s. 209. Learned counsel for the petitioner has stressed the fact that there could hardly be any need for an investigation when even a special audit had been dropped as stated above.

26. Although the facts would suggest that the Company Law Board is reopening the matter which it appears to have closed earlier, nevertheless we have to examine the affidavit in detail to see what is actually stated. It would make very little difference if the inspection or audit or other steps taken earlier did not reveal anything or were dropped. In now proceed to examine the contents of the affidavit of Shri S. Balaraman under the various heading mentioned in that affidavit.

27. Working of the steel unit.

28. Under this heading, it is stated in the affidavit that this is the major investment by the company. It is claimed that the working results were not satisfactory during the years in question. In 1970-71, there was a profit of Rs. 129.10 lakhs, in 1071-72 a profit of Rs. 60.26 lakhs, in 1972-73 a profit of Rs. 0.066 lakhs, and in 1973-74 a loss of Rs. 67.53 lakhs. It is claimed that the lesser profit for 1971-72 was also due to the adjustment of scrap of the book value of Rs. 12.60 lakhs in the books of the company. It is claimed that this is not correct. The explanation given to the various authorities is contradictory. It is stated that the working results of the steel units show that the melting losses are increasing, and also, consumption of electricity, graphite electrodes and other materials is increasing per metric tonne without any satisfactory explanation. It is claimed that his indicates the possibility of selling the material outside the books or the processing of scrap of other parties at the cost of the company. Therefore, it is necessary to investigate the truth particularly, as there was not satisfactory explanation for adjustment of the scrap.

29. There was some difficulty in understanding the case made out in the affidavit under this heading. The fact that Rs. 12.60 lakhs had been adjusted is not in doubt, but the circumstances set out do not reveal what are the circumstances which would show fraud, misconduct or misfeasance. These terms have been analysed in the judgment of Shelat J. in Barium Chemicals Ltd.'s case [1966] 36 Comp Case 639 (SC). They are also set out in s. 543 of the Companies Act, 1956. The words used in s. 237 are as follows :

"237. Investigation of Company's affairs in other cases. - 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 may direct, if -

(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;

(ii) that persons concerned in the formation of the company or the management of its affairs have in connection there with 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 affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasures, or the manager, of the company."

30. We are concerned with sub-clause (b) (ii). The circumstances must show that some persons connected with the management have been guilty of fraud, misfeasance or other misconduct towards the company. The words "been guilty" are strong words. So, there must be some circumstance which would lead to the inference that there has been some fraud, misfeasance, breach of trust or other misconduct which requires investigation. The fact that a certain adjustment has been made in the books of account is not a concealed occurrence.

31. In order to understand the point involved, we have examined the affidavit filed in reply to these allegations. This reveals that the fall in profits was occasioned by rise in the cost of raw materials and increased conversion cost. There was also a drastic power cut in the State of Uttar Pradesh which decreased the production of steel from 73,297 tons in 1971-72 to 27,208 tons in 1973-74. It was claimed that the increase in melting loss was due to the nature of the scrap purchased and technical matters regarding various types of scrap, such as heavy scrap, light or turning scrap has been given. It is claimed that the petitioner-company was forced to purchase low quality scrap due to circumstances. As far as the claim regarding Rs. 12.60 lakhs adjustment is concerned, it is pointed out that the Collector of Central Excise had also claimed that Rs. 12.60 lakhs worth of scrap had been removed from the factory without payment of excise duty, but the matter had been dropped as there was no surreptitious production and removal by the petitioner-company. The Income-tax Officer had added Rs. 70 lakhs to the income of the petitioner on the same or similar allegations, but the Appellate Assistance Commissioner by an order dated 5th August, 1977, had held that the allegation of unaccounted production or sale could not be sustained. The reasons given for this were : (a) the accounting and quantitative records of the assessed maintained from purchase of the stage of finished products, (b) the employment of a large number of workers and staff without whose connivance the products could not obviously be removed or sold, (c) the fact that bonus was payable based on production. Furthermore, the operations were handled by outside contractors and quantitative records of finished goods fully reconciled with outside contractor's wage bills. No discrepancy in the record had been pointed out, and there was no evidence of any unaccounted sale of finished goods.

32. From this affidavit and the circumstances of the case we have to determine whether these is any objective fact rather than subjective fact to show that any steel had been surreptitiously removed after producing the same. The explanation offered by counsel for the petitioner was that it is customary to check the stock at the end of the accounting period and it is only on the basis of verification that the stock of scrap was reduced by Rs. 12.60 lakhs. It is pointed out that the scrap is bought in bulk and consumed periodically. It is only when the stock is to be accounted for at the end of the year that a stock-taking is made. The exact position, therefore, is that the adjustment of Rs. 12.60 lakhs is merely a verification of the actual existing state of affairs rather than any change in the actual stock-in-hand (of scrap).

33. It is, therefore, plain that there are two possibilities which are stated to be the circumstances under this heading. There is the adjustment of Rs. 12.60 lakhs worth of scrap and there is a fall in the rate of profit, etc. By themselves, these facts cannot show the existence of any fraud, misfeasance or other misconduct. These are not circumstances, but mere guesses. It cannot be objectively stated that any reasonable person could say that this shows that there has been fraud or misconduct. In fact, the point becomes much easier to understand when one examines the profit and loss account for the year ending 31st October, 1972. The raw materials consumed in that year were Rs. 19,83,96,747.93. In the year 1975-76, the raw materials were Rs. 22,22,54,888.84. When raw materials worth crores of rupees are consumed in a year, it would obviously be very difficult to maintain an exact check on the actual stock of any raw material and, therefore, it is not surprising that a discrepancy is likely to occur if ascertained at the end of the financial year. It cannot be said that an open and clear statement in the books of account regarding the adjustment and the existence of the same can lead to an inference that there has been fraud, misconduct or misfeasance. It must also be understood that when the goods leave the factory they have to pass the excise authorities. Without some contravention being discovered or ascertained it cannot be said that any circumstance exists. Certainly, if some steel was found to have escaped excise or some other facts tended to show that the scrap had been otherwise removed, circumstances might have been different. So, this particular circumstance is not sufficient to sustain the order.

34. Working of gas and Chemical units Under this heading, it is claimed in the affidavit that the company produces oxygen, nitrogen and acetylene gas. The company had purchased 23,125 cylinders, but 631 cylinders had been lost and there is a dispute about 443 other cylinders. It was claimed that 375 of these cylinders had been lost by the Delhi agent, M/s. Modi Industries Agency and Industrial Gas Distributors, of which 353 had been lost in the year 1970-71. It is claimed that these cylinders are being used the Delhi agent for their own business who are taking advantage of the goodwill of the company and selling Modi gas. In connection with acetylene gas, it is claimed that the company started 30 MT. of calcium carbide which was later on treated as having been received for the purpose of processing. These allegations are refuted in the affidavit in reply. It is stated that the lost cylinders had been paid for. A copy of the agreement with the agent has also been filed. It is stated that the replacement cost of these cylinders had been received. It cannot be said that these allegations can show circumstances of the type mentioned in s. 237.

35. With regard to the other allegation concerning the diversion of 30 MT. of calcium carbide, it is stated that there is nothing in the record of the company to show this and no reasonable man could come to such a conclusion. It appears that the explanation of the company is correct. No material has been placed before us to show how and where these 30 MT. of calcium carbide are mentioned except in the affidavit. It may be recalled that in the Barium Chemical's case [1966] 36 Comp Case 639 (SC), and in the Rohtas Industries case [1969] 39 Comp Case 781 (SC) specific allegations regarding the transactions were placed before the court. But, the mere allegation that 30 MT. is reported to have been the dated as being received from another is not enough. Who is the person who made this report ? Where were these 30 MT. of calcium carbide removed and for whom ? It appears that the allegation is completely vague.

36. Working of distillery unit Under this heading, it is claimed that 600 cylinders other than those used for other gases have been lost. It is claimed that the cylinders were still in use and there was a diversion of the profits of this business to some on else. Again, no specific material has been borough to show the existence of objective circumstances. In the affidavit-in-reply, it is stated that there has been a fall in the production of calcium carbide because customer's cylinders used to be utilised for this purpose. However, it appears to be admitted that some cylinders were lost because they were not returned by the agent, as they were not returned to the agent by customers. In the affidavit, it is stated that carbon-dioxide was a bye-product from fermentation of molasses and was not of such good quality as to be used by big customers like Coca-Cola and Gold Spot. Actual figures showing that the number of cylinders supplied by customers for filing carbon-dioxide gas had fallen form 4,495 to 968 in the period 969-70 to 1972-73, are also set out. It is then stated that due to a letter written by the Chief Inspector of Explosives of India, Nagpur, the filling of customer's cylinders was discontinued as customers could not produce certificates of fitness. Furthermore, the allegation that any carbon-dioxide was sold outside the books of the company is payable on the production and selling of carbon-dioxide and the excise department has not found anything wrong in the books of the company.

37. It does seem that the allegations are vague and indefinite. What do the allegations mean ? Some cylinders are missing, but the explanation is similar to the one given regarding the other cylinders. As far as the fall of production is concerned, an explanation has been offered. The Company Law Board is not concerned with the quantum of production, but with the question whether an inference can be raised from circumstances showing the existence of fraud, misconduct, etc. It cannot possibly be said that the carbon-dioxide is being manufactured and sold outside the books of the company without some other circumstances being shown to exist concerning this fact. So, the circumstances set out in the affidavit would not justify the order under this heading.

38. It is alleged in the affidavit that as the cylinders are reported to be lost but the employment of cylinders shows that they are in use, hence this business was being done outside the books of the company. As explained by the company, this would mean that the carbon-dioxide is being smuggled out of the premises of the company in spite of the excise department. As no facts appear in the affidavit showing that any cylinders have been found to have been smuggled out, this appears to be merely a conjecture rather than a circumstance.

Working of sugar unit :

39. Under this heading, the irregularities alleged to exist are : (a) in the manner in which items have been classified, (b) it is alleged that certain repairs are of a capital nature which should have been capitalised and this has resulted in fall in production, (c) the stores account did not tally with the stores ledger maintained in the head office, so the company was not maintaining proper control over the stores, (d) the consumption record of firewood and coal showed some discrepancies, (e) the costing record was not maintained in accordance with the Cost Accounting Rules. As is obvious, all these circumstances are concerned with the manners in which account books are maintained. These allegations are characterised entirely as baseless in the affidavit-in-reply. It is pointed out that the Registrar of Companies had by a letter dated 20th July, 1977, raised similar points with specific instances and the whole matter was clarified to the Registrar. It was there stated that the accounts of the company were correctly maintained. A quotation from that letter is set out in the affidavit filed by the company. It is sufficient for the purposes of this petition to say that there may be difference between the department and the company as to how the accounts should be maintained, but this cannot possibly lead to an inference that there has been a breach of trust or fraud, etc. So, this ground does not appear to disclose any circumstances which would be relevant for an order under s. 237.

Working of vanaspati unit :

41.Under this heading, the irregularities pointed out in the affidavit are : (a) details of commission amounting to Rs. 20,575.78 on the purchase of tin plates could not be obtained at the time of inspection, (b) the report has shown wide fluctuations in the refining loss. In the absence of satisfactory explanation there was a possibility of underhand dealings. So, a further probe was necessary, (c) vanaspati was sold on some favorable terms to a firm, M/s. Banarsidas Ramniwas of New Delhi, which is owned by relatives of one of the managing director of the company. Some favors had also been given to this firm, (d) irregularities had been noticed in the sale and distribution of vanaspati which is not in conformity with the orders issued by the State Govt. under the defense of India Rules. In reply to this the affidavit of the company raises the following points :

(a) With regard to the allegation concerning commission, it is stated that this is only a book adjustment as simultaneous credit is given under the advice of the Calcutta Sales Depot. The commission is neither an expenditure nor a receipt by the company.

(b) As regards the refining loss, technical reasons are given; some loss takes because the oil used in the production of vanaspati is purchased from Delhi, Hyderabad and Rajasthan. In some cases excessive impurities are contained. Refining losses depend on a number of factors, namely, the quality of oil, suspended impurities, muscilage, power failure and efficiency of workers. It is claimed that the refining losses increase due to more free fatty acid content. It is stated that the Appellate Assistant Commissioner, Central Range, Meerut, by an order dated 30th March, 1978, had held that the refining losses were not excessive.

(c) As regards the sale to M/s. Banarsidas Ramniwas of New Delhi, it is claimed that there is not relationship of the directors of the company within the meaning of the Companies Act. It is claimed that the price of vanaspati fluctuates from day to day and hour to hour and in no case was a lesser rate charged. As far as credit facilities are concerned, it is stated that similar facilities are given to other firms, namely, Salig Ram Nagar Mal, Hapur, and Mangal Sen Faquir Chand, Baraut.

42. As regards (d) it is claimed that no breach has taken place.

43. Again, all these allegations are vague and of an indefinite type. Although the allegations have been denied, it does appear that the same are wholly irrelevant for the purposes of s. 237 (b) as alleged in the affidavit-in-reply. The main purpose, object and necessity for applying as. 237 is to ascertain irregularities which show breach of trust, misconduct or misfeasance and allegations of a different type cannot be made a substitute for the necessary circumstances.

Working of soap unit

44. The last heading under which the allegations are made refer to soap. It is alleged that the soap transferred from the vanaspati unit does not reconcile with that received by the soap unit. It is further claimed that import of stainless steel rods from a company in Derbyshire, U.K., and Monel Wire from a firm in Paris were made in the year 1972-73, as actual user, but when this material was found to be defective or unsuitable it was sold to parties in Bombay, resulting in a profit to the company. It is alleged that the sale was made without the permission of the Chief Controller of Imports and Exports. In reply, the affidavit states that there is no difference between the soap sent by the vanaspati unit and that received by the soap unit. This matter has also been considered by the income-tax authorities and the decision of the Inspecting Assistant Commissioner is quoted. It is pointed our that the Income-tax Officer had considered that 3.92 MT. was the difference and had claimed that this was due to suppressed production, but the Inspecting Assistant Commissioner had held that the Income-tax Officer had failed to notice the opening stock and the closing balance and there was a mistake by the Income-tax Officer. Thus, this very objection was rejected by the income-tax department.

45. As regards the sale of imported goods, it is pointed out that by selling the defective material at a profit, the company has acted as a prudent businessman and this could not be a point for an order under s. 237 (b).

46. Again, it appears that no circumstance justifying an investigation can be said to exist and no reasonable man could have ordered an enquiry into the alleged breach of trust, misfeasance or misconduct.

47. These are in all the allegations which have been minutely examined for the purpose of ascertaining whether any of them would justify an investigation. In reaching the conclusion that there are no circumstances to justify an investigation it has to be kept in view that an investigation is made when an offence is claimed to exist. If one compares the case of a criminal offence, first, there must be a report about the commission of an offence which may be by complaint or by police report. Once, it is found that there is an offence or an apparent offence then a prima facie case exists for making an investigation. Similarly, there must be some kind of facts objectively existing which show that an offence of the type mentioned in s. 237(b) has taken place. It must be kept in view that the offences mentioned in s. 237 (b) are of a serious nature. Fraud in the running of a company or misconduct or misfeasance by the management of the same are serious matters. The directors of a company are in the position of trustees. They are responsible like trustees. The allegations we have referred to deal with the manner in which the business is being conducted. Whether one considers the steel unit and the allegation concerning the possibility of production existing outside the books of the company or one considers the gas and Chemical unit and the possibility of the cylinders being used for making clandestine sales of gases, or the possibilities in the distillery unit of carbon-dioxide being manufactured secretly or if one considers the vanaspati unit or the soap unit, it is not possibilities that have to be ascertained but realities. The section is not intended to deal with a roving and fishing enquiry with a view to establishing that there has been a fraud or misconduct or misfeasance. The offence must be there and then the investigation can take place. An investigation for finding out whether there has been an offence means that the investigation is made in the circumstances which do not justify it. Allegations of the type made in the present case can be made in the case of practically every single company which would mean that the Central Govt. would have unrestricted powers of ordering investigation.

48. It is noteworthy that most of the points, and probably all the points, have been separately looked into by the income-tax department while determining the income and running of the company. Similarly, the excise department which is concerned with the realisation of excise duty is also deeply concerned with the manner in which the goods produced by the petitioner-company are taken out of the factory. If neither of these departments have been able to ascertain that any of the products of the company have been taken out secretly or there is a manufacture outside the books of the company, it is still possible that those departments have been hood-winked or have not noticed some additional circumstances which have come to light during the investigation carried out under s. 209A or the other provisions of the Companies Act, which have been noticed above. However, the most noteworthy feature of this case is that a special audit under s. 233A which was posed was dropped after considering the books of the company. As all the facts under consideration relate to the years 1971-72 to 1975-76, it does appear that no new material had come to light which did not exist earlier.

49. The result of all this analysis would show that the requirements of the section as pointed out by the Supreme Court in the aforementioned judgments have not been fulfillled. The circumstances which must exist objectively have not been shown to exist. It would thus follow that we have to accept the present petition and quash the order passed by the Company Law Board exercising the powers of the Central Govt. under s. 237(b) of the Act. We accordingly issue a writ to quash the order dated 12th May, 1977, whereby inspectors were appointed to make an investigation into the affairs of the company. The petitioner will get costs of this petition. Counsel's fee Rs. 500.