The Barium Chemicals Ltd. & ANR Vs. The Company Law Board & Ors [1966] INSC 116 (4 May 1966)
1966 Latest Caselaw 116 SC

The Barium Chemicals Ltd. & ANR Vs. The Company Law Board & Ors [1966] INSC 116 (4 May 1966)

04/05/1966 MUDHOLKAR, J.R.

MUDHOLKAR, J.R.

SARKAR, A.K. (CJ) HIDAYATULLAH, M.

BACHAWAT, R.S.

SHELAT, J.M.

CITATION: 1967 AIR 295 1966 SCR 311

CITATOR INFO :

R 1969 SC 707 (16,19,20,39,46) RF 1970 SC 564 (26,228,229,235) R 1970 SC1789 (14) RF 1972 SC1816 (18) F 1974 SC1957 (12) R 1974 SC2105 (10) RF 1977 SC 183 (26) R 1978 SC 597 (222) D 1982 SC 149 (1245) E 1984 SC 273 (45) F 1984 SC1182 (11) C 1984 SC1271 (26) R 1986 SC 872 (119) R 1986 SC2173 (12) R 1986 SC2177 (45) E&D 1987 SC 294 (38) R 1990 SC 334 (105) RF 1990 SC1277 (51) RF 1991 SC1557 (21) RF 1992 SC1020 (26)

ACT:

Companies Act, 1956, ss. 10E, 234, 235, 236 and 237-scope of Whether s. 237(b) violative of Articles 14 and 19(1) (g) of the Constitution.

HEADNOTE:

The Company Law Board was constituted under Section 10E of the Companies Act, 1956, and the Central Government delegated some of its powers under the Act, including those under Section 237, to the Board. The Government also framed rules under Section 642(1) read with Section 10E(5) called the Company Law Board (Procedure) Rules 1964, Rule 3 of which empowered the Chairman of the Board to distribute the business of the Board among himself and other member or members and to specify the cases or classes of cases which were to be considered jointly by the Board. On February 6, 1954, under the power vested in him by Rule 3 the Chairman passed an order specifying the cases that had to be considered jointly by himself and the only other member of the Board and distributing the remaining business between himself and the member. Under this order the business of ordering investigations under Sections 235 and 237 was allotted to himself to be performed by him singly.

On May 19, 1965 an order was issued on behalf of the Company Law Board under Section 237(b) of the Companies Act.

appointing four inspectors to investigate the affairs of the appellant company, on the ground that the Board was of the opinion that there were circumstances suggesting that the business of the appellant company was being conducted with intent to defraud its creditors, members or any other persons and that the persons concerned in the management of the affairs of the company had in connection therewith been guilty of fraud, misfeasence and other misconduct towards the company and its members.

Soon afterwards the appellants filed a petition under Art.

226 of the Constitution for the issue of a writ quashing the order of the Board on the grounds, inter alia, that the order had been issued mala fide that there was no material on which such an order could have been made, etc.

One of the affidavits filed in reply to the petition was by the ,Chairman of the Company Law Board, in which it was contended, inter alia, that there was material on the basis of which the impugned order was issued and he had himself examined this material and formed the necessary opinion within the meaning of sec. 237(b) before the issue of the order; and that it was not competent for the court to go into the question of the adequacy or otherwise of such material. In the course of replying to some of the allegations in the petition it was stated in paragraph 14 of the affidavit, however, that from memoranda received from some ex-directors of the company and other examination it appeared, inter alia, that there had been delay, bungling and faulty planning of the company's main project ,resulting in double expenditure; that the company had incurred huge losses; there had been a sharp fall in the price of the company's SCI-22 312 shares; and some eminent persons had resigned from the Board of Directors of the company because of differences with the Managing Director on account of the manner in which the affairs of the company were being conducted.

The appellant's petition was dismissed by the High Court.

In the appeal to this Court it was contended on behalf of the appellants:

(1) That the order was made fide on account of the competing interests of a firm in which the Minister in charge of the department was interested and also because of his personal hostility against the second petitioner who was the managing director of the company; that the High Court had erred in deciding the petition on the footing that the first respondent Board was an independent authority and that it was its Chairman who on his own had formed the requisite opinion and passed the order and therefore the motive or the evil eye of the Minister was irrelevant; the High Court also erred in failing to appreciate that even though the impugned order was by the Chairman, as under s. 10E(6) it had to receive and in fact received the Minister's agreement, if the Minister's mala fides were established, that would vitiate the order; furthermore, in the circumstances of the case. the High Court ought to have allowed the appellants an opportunity to establish their case of mala fide by the cross-examination of the Minister and the Chairman, both of whom had filed affidavits.

(2) That clause (b) of Section 237 required two things: (i) the requisite opinion of the Central Government, in the present case, of the Board, and (ii) the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (i) or that the persons mentioned in sub-clause (ii) were guilty of fraud, misfeasance or misconduct towards the company or any of its members; though the opinion to be formed is subjective, the existence of circumstances set out in cl. (b) is a condition precedent to the formation of such opinion and therefore even if the impugned order were to contain a recital of the existence of those circumstances, the court can go behind that recital and determine whether they did in fact exist, that even taking the circumstances said to have been found by the respondent Board, they were extraneous to see. 237(b) and could not constitute a basis for the impugned order.

(3) That the impugned order was in fact made on the basis of allegations contained in memoranda submitted by four exdirectors of the company who continued to be shareholders;

and by ordering an investigation under s. 237(b) the respondent Board had in effect enabled these shareholders to circumvent the provisions of s. 235 and S. 236. On this ground also the impugned order was therefore made mala fide or was otherwise invalid.

(4) That the impugned order was in any case bad as it was passed by the Chairman of the Respondent Board alone acting under rules under which such a power was conferred in contravention of the provisions of Section 10E. The power under s. 237 was delegated by the Central Government to the Board as a whole and could not in turn be sub-delegated to the Chairman alone in the absence of a provision such as sub-sec. (4A) added to sec. 10E after the impugned order was issued, and which now enabled the solidarity of the Board to be broken. Such sub-delegation could not be done in accordance with rules made under s. 10E(5) which merely enabled the procedure of the Board to be regulated.

313 (5) That the impugned order was bad because Section 237(b) itself was bad as offending against Arts. 14 and 19 of the Constitution.

HELD: (By Hidayatullah. Bachawat and Shelat, JJ., Sarkar C.J. and Mudholkar J. dissenting): The impugned order must be set aside.

(1) (By the Court): The respondents had failed to show that the impugned order was passed mala fide. L330 E; 335 B-C;

342 F; 354 F-G].

(Per Sarkar C.J. and Mudholkar J.3: The decision to order the investigation was taken by the Chairman of the respondent Board and there was nothing to indicate that in arriving at that decision he was influenced by the Minister.

If the decision arrived at by the Chairman was an independent one, it could not be said to have been rendered mala fide because it was later approved by the Minister.

[320 D].

In a proceeding under Art. 226 of the Constitution, the normal rule is, as pointed out by this Court in The State of Bombay v. Purshottam Jog Naik [1952] S.C.R. 674, to decide disputed questions on the basis of affidavits and that it is within the discretion of the High Court whether to allow a person who has sworn an affidavit before it to be crossexamined or not. The High Court having refused permission for the cross-examination, it would not be appropriate for this Court, while hearing an appeal. by special leave, to interfere lightly with the exercise of its discretion. [320 G-H; 321 A].

(Per Shelat J.): The allegations of mala fides in the petition were not grounded on any knowledge but only on "reasons to believe". Even for their reasons to believe, the appellants had not disclosed any information on which they were founded. No particulars of the main allegations were given. Although in a case of this kind it would be difficult for a petitioner to have personal knowledge in regard to an averment of mala fides, where such knowledge is wanting, he must disclose his source of information so that the other side gets a fair chance to verify it and make an effective answer. In the absence of tangible materials, the only answer which the respondents could array against the allegations as to mala fides would be one of general denial.

[352 D-H].

In a petition under Art. 226, there is undoubtedly ample power in the High Court to order attendance of a deponent in court for being cross-examined. Where it is not possible for the court to arrive at a definite conclusion on account of there being affidavits on either side containing allegations and counter-allegations, it would not only be desirable but in the interest of justice the duty also of the court to summon a deponent for cross-examination in order to arrive at the truth. However, the High Court was rightly of the view that in the present case even if the two deponents were to be called for cross-examination, they could in the absence of particulars of allegations of mala fides and the other circumstances of the case, only repeat their denials in the affidavits of the allegations in the petition and therefore such cross-examination would not take the court any further than the affidavits. [353 D-H].

(2) (Per Hidayatullah, Bachawat and Shelat JJ.

Sarkar, C. J. and Mudholkar J. dissenting,):The circumstances disclosed in paragraph 14 of the affidavit must be regarded as the only materials on the basis of which the respondent Board formed the opinion before ordering an investigation under Section 237(b). These circumstances could not reasonably suggest that the business of the company was being conducted to defraud the creditors, members or other L/S5SCI-22(a) 314 persons or that the management was guilty of fraud towards the company and its members; they were therefore, -extraneous to the matters mentioned in s. 237(b) and the impugned order was ultra vires the Section. [339 A-D, G-H;

340 A; 342 G-H; 343 AC; 365 D-E; 367 A-C].

(Per Hidayatullah J.): The power-under Section 237(b) in a discretionary power and the first requirement for its exercise is the 'honest formation of an opinion that an investigation is necessary. ,The next requirement is that "there are circumstances suggesting" the inferences stout in the Section. An action, not based on circumstances suggesting an inference of the enumerated kind will not be valid. 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 their existence is questioned, it has to be proved at least prima facie. It is not sufficient to assert, that the circumstances exist and give no clue to what they are, because 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. [335 F-H; 336 G-H] An examination of the affidavit filed by the Chairman of the respondent Board showed that the material examined by the Chairman merely indicated the need for a deeper probe. This was not sufficient. The material must suggest certain inferences and not the need for "a deeper probe". The former is a definite conclusion the 'latter a mere fishing expedition. [338 E-H].

(Per Shelat J.): Althouugh the formation of opinion by central Government is a purely subjective process and such an opinion cannot be challenged in a court on the ground of propriety, reasonableness or sufficiency, the Authority concerned is nevertheless required to arrive at such an opinion from circumstances suggesting what is set out in sub-clauses (i), (ii) or (iii) of s. 237 (b). The expression "circumstances suggesting" cannot support the construction that even the existence of circumstances is a matter of subjective opinion. It is hard to contemplate that the legislature could have left to the subjective process both the formation of opinion and also the existence of circumstances on which it is to be founded. It is also not reasonable to say that the clause-permitted the Authority to say that it has formed the opinion on 'circumstances which in its opinion exist and which in its opinion suggest an intent to defraud or a fraudulent or unlawful purpose. If it is shown that the circumstances do not exist or that they are such that it is impossible for anyone to form an opinion there from suggestive of the matters enumerated in s. 237 (b) the opinion is challengeable on the ground 'of non-application of mind or perversity or on the ground that it was formed on collateral grounds and was beyond the scope of the statute. [362 H; 363 A-G].

(Per Sarkar C.J., and Mudholkar J.. dissenting): An examination of section 237 would show that cl. (b) thereof confers a discretion upon the 'Board to appoint an Inspector to investigate the affairs of a company. The words "in the opinion of" govern the word "there are circumstances suggesting" and not the words "may do so". The words 'circumstances' and 'suggesting' cannot be dissociated without making it impossible for the Board to form an 'opinion' at all. The formation of an opinion must, 'therefore, be as to whether there are circumstances suggesting the existence of one or more of 'the matters in sub-cls. (i) to (iii) and not about anything else. The opinion must of course not have been arrived at mala fide.

To say that the, opinion to be formed must be as to the necessity 315 of making an investigation would be making a clear departure from the language in which s. 237(b) is couched. It is only after the formation of certain opinion by the Board that the stage for exercising the discretion conferred by the provision is reached. The discretion conferred to order an investigation is administrative and not judicial since its exercise one way or the other does not affect the rights of a company nor does it lead to any serious consequences as, for instance, hampering the business of the company. As has been pointed out by this Court in Raja Narayanalal Bansilal v. Maneck Phiroz Mistry and Anr. [1961] 1 S.C.R. 412, the investigation undertaken under this provision is for ascertaining facts and is thus merely exploratory. The scope for judicial review of the action of the Board must, therefore be strictly limited. If it can be shown that the Board had in fact not formed an opinion its order could be successfully challenged. There is a difference between not forming an opinion at all and forming an opinion upon grounds, which, if a court could go into that question at all, could be regarded as inapt or insufficient or irrelevant.

The circumstances set out in paragraph 14 of the affidavit of the Chairman of the respondent Board were nothing more than certain conclusions drawn by the Board from some of the material which it had before it. Moreover, the expression "inter alia" used by the Chairman would show that the conclusions set out by him specifically were not the only ones which could be drawn from the material before the Board. It would not therefore be right to construe the affidavit to mean that the only conclusions emerging from the material before the Board were those set out in paragraph 14. [352 A-E].

(3) (Per Sarkar C. J. and Mudholkar J.): As it could not be said that the investigation had been ordered either at the instance of 4 ex-directors of the company or on the sole basis of the memoranda submitted by them, there was no contravention of the provisions of Sections 235 and 236 of the Act. [328 C, E].

(4) (Per Sarkar C. J., Mudholkar and Bachawat JJ., Hidayatullah and Shelat JJ., dissenting): Rule 3 of the Company Law Board (Procedure) Rules, 1964, and the order dated April 6, 1964 made pursuant thereto distributing the business of the Board, were both valid. The impugned order was not therefore invalid because it was made by the Chairman alone and not by the Board. [330 C. D; 342 B-C].

(Per Sarkar C.J. and Mudholkar J.): Bearing in mind the fact that the power conferred by Section 237(b) is merely administrative, the allocation of the business of the Board relating to the exercise of such power must be regarded as a matter of procedure. Strictly speaking the Chairman to whom the business of the Board is allocated does not become a delegate of the Board at all. He acts in the name of the Board and is no more than its agent. But even if he is looked upon as a delegate of the Board and, therefore, sub delegate vis-avis the Central Government, he would be as much subject to the control of the Central Government as the Board itself, for sub-s. (6) of s. 10E provides that the Board shall, in the exercise of the powers delegated to it, be subject to the control of the Central Government and the order distributing the business was made with permission of the Central Government. Bearing in mind that the maxim delegates non protest delegable sets out what is merely a rule of construction, sub delegation can be sustained if permitted by an express provision or by necessary implication. Where, as here, what is sub-delegated is an administrative power and control over its exercise is retained by the nominee of Parliament, that is, here the Central Government, the power to make a delegation may be inferred, [329 F-H; 330 A-C].

316 (Per Bachwat J.): The function under s. 237(b) involves the exercise of a discretion. Prima facie all the members of the Board acting together were required to discharge this function and they could not delegate their duty to the Chairman. However, under ss. 10E(5) and 642(1), the Central Government may frame rules regulating the procedure of the Board and generally to carry out the purpose of the Act. In the context of s. 10E, the rule making power should be construed liberally. The Central Government has power to constitute the Company Law Board, to delegate its function to the Board and to control the Board in the exercise of its delegated functions. In this background, by conferring on the Central Government the additional power of framing rules regulating the procedure of the Board and generally to carry out the purposes of s. 10E Parliament must have intended that the internal Organisation of the Board and the mode and manner of transacting its business should be regulated entirely by rules framed by the Government. The Government had, therefore, power to frame the Company Law Board (Procedure) Rules. 1964 authorising the Chairman to distribute the business of the Board. In the exercise of the power conferred by this rule, the Chairman assigned the business under s. 237 to himself. The Chairman alone could, therefore, pass the impugned order. [341 F-H; 342 A-C].

(Per Hidayatullah J.): The new sub-section 4A of Section 10E, which was not there when the impugned order was made.

enables the work of the Board to be distributed among members, while sub-s. (5) merely enables the procedure of the Board to be regulated. These are two very different things. One provides for distribution of work in such a way that each constituent part of the Board, properly authorised. becomes the Board. The other provides for the procedure of the Board. What is the Board is not a question which admits of solution by procedural rules but by the enactment of a substantive provision allowing for a different delegation. Such an enactment has been framed in relation to the Tribunal constituted under s. 10B and has now been framed under s. 10E also. The new sub-section involves a delegation of the powers of the Central Government to a member of the Board which the Act previously allowed to be made to the Board only. The statute, as it was formerly, gave no authority to delegate if differently or to another person or persons. When it spoke of procedure in sub-section (5) it spoke of the procedure of the Board As constituted. The lacuna in the Act must have felt;

otherwise there was no need to enact sub-section (4A), [334 B-E].

(Per Shelat T.): The statute having permitted the delegation of powers to the Board only as the statutory Authority the powers so delegated have to be exercised by the Board and not by its components. To authorise its Chairman to hand over those functions and powers to the. Board only as the statutory Authority, the powers so by the Act. The effect of r. 3 and the order of distribution of work made in pursuance thereof was not laying down a procedure but authorising and, making a sub-delegation in favour of the members. The only procedure which the Government could prescribe was the procedure in relation to Board the manner in which it should discharge and exercise the functions and Powers delegated to it, but it could not make a provision which under the cloak of procedure authorised sub delegation. [369 F-H; 370 A, B].

(5) (By the Court): The provisions of Section 237(b) were not violative of Articles 14 and 19 of the Constitution.

[328 F-G; 342 D-F; 371 H].

Sections 234, 235, 236 and 237(b) gave power to different authorities i.e. the Registrar and the Government, provided powers which 317 are different in extent and nature, exercisable in sets of circumstances and in a manner different from one another.

Therefore, there is no question of discriminatory power having been vested in the Government under these Sections to pick and choose between (one company and the other. [370 G, H].

When investigation is ordered, there would be inconvenience in the carrying on of the business of the company. It might also perhaps shake the credit of a company. But an investigation directed under section 237(b) is essentially of an exploratory character and it is not as if any restriction is placed on the right of the concerned company to carry on its business and no restrictions are imposed on those who carry on the company's affairs. Even if it is regarded as a restriction, it is not possible to say that it is not protected as a reasonable restriction under Clause 6 of Art. 19(1). [371 B-D].

Case law referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 381 of 1966.

Appeal by special leave from the judgment and order dated October 7, 1965 of the Punjab High Court (Circuit Bench) at Delhi in Civil Writ No. 1626-C of 1965.

M. C. Setalvad, R. K. Garg and S. C. Agarwala, for the appellants.

C. K. Daphtary, Attorney-General, B. R. L. Iyengar, R. K. P. Shankardass and R. H. Dhebar, for respondents Nos. 1 and 3 to 7.

S. Mohan Kumaramangalam, C. Ramakrishna and A. V. V. Nair, for respondent No. 2.

The dissenting Opinion Of SARKAR, C.J. and MUDHOLKAR., J.

was delivered by MUDHOLKAR, J HIDAYATULLAH. BACHAWAT and SHELAT JJ. delivered separate judgments allowing the Appeal.

Mudholkar, J. On May 19, 1965 Mr. D. S. Dang, Secretary of the Company Law Board issued an order on behalf of the Company Law Board made under s. 237 (b) of the Companies Act, 1956 appointing 4 persons as Inspectors for investigating the affairs of the Barium Chemicals Ltd., appellant No. I before us, since its incorporation in the year 1961 and to report to the Company Law Board inter alia "all the irregularities and contravention in respect of the provisions of the Companies Act, 1956 or of any other law for the time being in force and the person or persons responsible for such irregularities and contravention." The order was made by the Chairman of the Board, Mr.. R. C. Dutt on behalf of the Board by virtue of the powers conferred on him by certain rules to which we shall refer later. On June 4, 1965 the Company preferred a writ petition under Art. 226 of the Constitution in the Punjab High Court for the issue of a writ of mandamus or other appropriate writ, direction or order quashing the order of the Board dated May 19, 1965.

The Managing Director, Mr. Balasubramanian joined in the petition as petitioner No. 2. The writ petition is directed against 7 respondents, the first of which is the 318 Company Law Board. The second respondent is Mr. T. T. Krishnamachari, who was at that time Minister for Finance in the Government of India. The Inspectors: appointed are respondents 3 to 6 and Mr. Dang is the 7th respondent.

Apart from the relief of quashingthe order of May 19, 1965 the appellants sought the' issue of a writ restraining the Company Law Board and the Inspectors from giving effect to the order dated May 19, 1965 and also sought some other incidental reliefs. The order of the Board was challenged on 5 grounds which are briefly as follows:

(1) that the order was made mala fide;

(2) that in making the order the Board had acted on material extraneous to the matters mentioned in s. 237(b) of the Companies Act;

(3) that the order having in fact been made at the instance of the shareholders is invalid and on a true construction of s. 237 this could not be done;

(4) that the order was invalid because it was made by the Chairman of the Board and not by the Board; and (5) that the provisions of S. 237(b) are void as offending Arts. 14 and 19(1) (g) of the Constitution.

The allegations of mala fides were denied on behalf of the respondents. They disputed the validity of all the other grounds raised by the petitioners. The High Court rejected the contentions urged before it on behalf of the appellants and dismissed the writ petition. The appellants thereafter sought to obtain a certificate of fitness for appeal to this Court; but the High Court refused to grant such a certificate. They have now come up to this Court by special leave.

In order to appreciate the arguments addressed before us a brief statement of the relevant facts would be necessary.

The Company was registered in the year 1961 and had an authorised capital of Rs. 1 crore divided into 1,00,000 shares of Rs. 100 each. Its primary object was to carry on business of manufacturing all types of barium compounds.

Appellant No. 2 was appointed Managing Director of the Company from December 5, 1961 and his appointment and remuneration were approved by the Central Government on July 30, 1962. The erection of the plant was undertaken by M/s.

L. A. Mitchell Ltd., of Manchester in pursuance of a collaboration agreement between it and the company entered in October, 1961 and approved by the Central Government in November of that year. Thereafter a permit for importing the requisite machinery was granted to the Company. The issued capital of the Company was Rs. 50, 00,000 and the public was invited to subscribe for shares in the Company.

It is said that the issue was oversubscribed by March 12, 1962.

319 It would see that soon after the collaboration agreement was entered into M/s. L. A. Mitchell Ltd., was taken over by a financial group (M/s. Pearwn, & Co. Ltd.), to which a. person named Lord Poole belonged. It would appear that as the work of setting up of the plant was being delayed the Company sent a notice to M/s Mitchell Ltd.., on April 2, 1965 in which the Company stated that if the plant was not completely installed and got into running order by June 1, 1965 the Company will have to make alternative arrangements and that it would hold M/s. L. A. Mitchell Ltd., liable to pay damages to the Company for the loss suffered by it. As a result of the notice Lord Poole visited India in April/May, 1965. In his opinion the design of the plant was defective. Certain negotiations took place between the Company and Lord Poole in the course of which an undertaking was given by Lord Poole on at behalf of the collaborators that the work would be completed with necessary alterations and modifications in accordance with the report of M/s.

Humphrey & Co., and that the collaborators would spend an additional amount upto pound 250,000 as may be required for the purpose. It is said that the plaint was producing at that time only 25 per cent of its installed capacity but that according to the assurance given by Lord Poole it would yield full production by April, 1966.

According to the appellants, before entering into a collaboration agreement with M/s. L. A. Mitchell Ltd., the appellant No. 2 Balasubramanian was negotiating with a German firm named Kali Chemie A. G. of Hanover for obtaining their collaboration. It is said that the firm of M/s. T.

T. Krishnamachari & Sons were and still are the sole agents in India for some of the products of Kali Chemie. The firm of T. T. Krishnamachari & Sons approached appellant No. 2 for the grant of sole selling, agency of the products of the plant to be established in collaboration with Kali Chemie.

Appellant No. 2 did not agree to this with the result that the company's negotiations with Kali Chemie broke down. The appellants also say that T. T. Krishnamachari & Sonswere later a so granted a licence to set up a plant for manufacturing barium chemicals but that on appellant No.

2 bringing certainfacts: to the notice of Mr. Nehru the licence in favour of T. T. Krishnamachari & Sons was revoked. The relevance of these facts is in connection with the plea of mala fides. On this part of the case the appellant's contention is that the Chairman of the Company Law Board Mr. R. C. Dutt made the order for investigation into the affairs of appellant No. 1 at the instance of Mr.

T. T. Krishnamachari, the then Finance Minister and also because of his bias against appellant No. 2. The suggestion is that as the licence of M/s. T. T. Krishnamachari & Sons was revoked and as they were not even given sole selling agency for the sale of the products of barium chemicals Mr. T. T. Krishnaniachari wanted action to be taken under this provision either for penalising appellant No. 1 or putting pressure on it.

320 A lengthy argument was addressed before us by Mr. Setalvad bearing on the question of mala fides in the course of which he referred us to certain documents. He also wanted us to bear in mind the sequence in which certain events occurred and said that these would indicate that the former Finance Minister must have been instrumental in having an order under S. 237(b) made by the Chairman of the Board. We were, however, not impressed by this argument. Our learned brother Shelat has dealt with this aspect of the matter fully in his judgment and as we agree with him it is not necessary to say much on the point. We would, however, like to refer to and deal with one aspect of the argument bearing on the question of mala fides. Mr. Setalvad points out that the Company Law Board had decided in December 1964 to take action against appellant No. I under s. 237(b) and had actually obtained approval of Mr. T. T. Krishnamachari to the proposed action. Therefore, according to him the real order is of Mr. Krishnamachari even though the order is expressed in the name of the Board. We find no substance in the argument. The decision to take action was already taken by the Chairman and there is nothing to indicate that in arriving at that decision he was influenced by the Finance Minister. If the decision arrived at by the Chairman was an independent one it cannot be said to have been rendered mala fide because it was later approved by Mr. Krishnamachari whose sons undoubtedly constitute the partnership firm of M/s. T. T. Krishnamachari & Sons. It is also suggested by Mr. Setalvad that the action approved of in December, 1964 was delayed till May, 1965 because in the interval some negotiations with Kali Chemie had been started and had they ended fruitfully M/s. T.T. Krishnamachari & Sons would have got the sole selling agency of the products of barium chemicals. Now it does seem from ,certain material brought to our notice that negotiations with Kali Chemie were revived by appellant No. 2 because of the difficulties which were being experienced in the working of the collaboration agreement with M/s. L. A. Mitchell Ltd. No material, however, is placed before us from which it could be reasonably inferred that had the negotiations with Kali Chemie fructified M/s. T. T. Krishnamachari & Sons would have secured the sole monopoly for sale of the products of barium chemicals. One more point was urged in connection with this aspect of the argument and it is that the appellants were not given an opportunity to cross-examine Mr. T. T. Krishnamachari and Mr. Dutt. In our opinion, in a proceedingunder Art. 226 of the Constitution the normal rule is, as pointedout by this Court in The State of Bombay v. Purshottam Jog Naik to decide disputed questions on the basis of affidavits and that it is within the discretion of the High Court whether to allow a person who has sworn an affidavit before it-as indeed Mr. Krishnamachari and Mr. Dutt have-to be cross-examined or not to permit it. In exercise of. its discretion the High Court has re321 fused permission to cross-examine them. In such a case it would not be appropriate for this Court while hearing an appeal by special leave to interfere lightly with the exercise of that discretion.

Mr. Setalvad said that as the appellants had made out a prima facie case of mala fides in their affidavits, and as these allegations had been denied by the respondents, the High Court was in error in refusing permission to the appellants to cross-examine the persons who swore the affidavits on the side of the respondents. We are not aware of the rule on which Mr. Setalvad bases himself. There is nothing to show that the High Court thought that a prima facie case of mala fides had been made out. Even in such a case a court might well hold that it has been demolished by the affidavits in answer. The court has to find the facts and if it finds that it can do so without cross-examination it is not compelled to permit cross-examination. We have no reason to think that the High Court could not have ascertained the facts on the affidavits themselves.

Coming to the second point, it would be desirable to reproduce s. 237 which reads thus:

"Without prejudice to its powers under section 235 the Central Government(a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government 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; or (ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or (iii) that the members of the company have not been given all the information with respect to its 322 affairs. which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, the managing agent, the secretaries and treasurers, or the manager of the company." In view of the fact that the Central Government, by virtue of the powers conferred by ss. 10-E and 637 delegated its powers under s. 237 to them Company Law Board we shall read S. 237 as if in place of the words "Central Government" there are the words "Company Law Board" or for brevity 'Board'. According to Mr. Setalvad, cl. (b) of s. 237 requires two things: (1) the opinion of the Board and (2) the existence of circumstances suggesting one or more of the matters. specified in sub-cls. (i) to (iii). He contends that though the opinion of the Board is subjective the existence of circumstances set out in the sub-cls. (i) to (iii) is a condition precedent to the formation of the opinion. Therefore, according to him, the Court is entitled to ascertain whether in fact any of those circumstances exists. The Attorney-General disputes this construction and contends that the clause is incapable of a dichotomy and that the subjective process embraces the formation of an opinion that circumstances suggestive of any of the matters comprised in sub-cls. (i) to (iii) exist.

Once it is conceded that the formation of an opinion by the Board is intended to be subjective-and if the provision is constitutional which in our view it is-the question would arise: what is that about which the Board is entitled to form an opinion? The opinion must necessarily concern the existence or non-existence of facts suggesting the things mentioned in the several sub-clauses of cl. (b). An examination of the section would show that cl. (b) thereof confers, a discretion upon the Board to appoint an Inspector to investigate the affairs of a company. The words "in the opinion of" govern the words "there are circumstances suggesting" and not the words "may do so". The words 'circumstances' and 'suggesting' cannot be dissociated without making it impossible for the Board to form an 'opinion' at all. The formation of an opinion must, therefore, be as to whether there are circumstances suggesting the existence of one or more ofthe matters in sub-cls. (D to (iii) and not about any-thing else. The opinion must of course not have been arrived at mala fide.

To say that the opinion to be formed must be as to the necessity of making an investigation would be making a clear departure from the language in which s. 237(b) is couched.

It is only after the, formation of, certain opinion by the Board that the stage for exercising the discretion conferred by the provision is reached. The discretion conferred to order an investigation is administrative and not judicial since 323 its exercise one way or the other does not affect the rights of a company nor does it lead to any serious consequences as, for instance, hampering the business of the company. As has been pointed out by this Court in Raja Narayanalal Bansilal v. Maneck Phiroz Mistry & Anr.(1) the investigation undertaken under this provision is for ascertaining facts and is thus merely exploratory. The scope for judicial review of the action of the Board must, therefore, be strictly limited. Now, if it can be shown that the 'Board had in fact not formed an opinion its order could be successfully challenged. This is what was said by the Federal Court in Emperor v. Shibnath Banerjee(2) and approved later by the Privy Council. Quite obviously there is a difference between not forming an opinion at all and forming an opinion upon grounds, which, if a court could go into that question at all, could be regarded as inapt or insufficient or irrelevant. It is not disputed that a court cannot go into the question of the aptness or sufficiency of the grounds ,upon which the subjective satisfaction of an authority is based. But, Mr. Setalvad says, since the grounds have in fact been disclosed in the affidavit of Mr. Dutt upon which his subjective satisfaction was based it is open to the court to consider whether those grounds are relevant or are irrelevant because they are extraneous to the question as to the existence or otherwise of any of the matters referred to in sub-cls. (i) to (iii).

Let us now examine the affidavit of Mr. Dutt. Since this affidavit is in answer to the allegations made in the writ petition the two ;should be considered together. In paragraphs 1 to 19 of the writ petition certain facts and figures concerning the formation, registration etc. of the company, the activities of the company and other related matters have been set out. These were admitted by Mr. Dutt in paragraph 14 of the counter-affidavit. Paragraph 20 onwards of the writ petition deals with the action taken by the Board and the various grounds on which according to the appellants the action of the Board is open to challenge.

The first 4 paragraphs of the counter-affidavit deal with certain formal matters. In paragraph 5 Mr. Dutt has set out that the petition is liable to be dismissed summarily being grounded on facts which are, false, speculative and lacking in material particulars. Thereafter he has set out what, according to him, are the true facts. In paragraphs 6 to 8 he has dealt with the legal aspects of the case. The 8th paragraph is the most important amongst them. Here Mr. Dutt has stated that it was not competent to the Court to go into the question of adequacy or otherwise of the material on the basis of which orders under s. 237(b) are passed by the Board. Then he stated: 'However, if in spite of what has been stated and contrary to the submissions above, this Han'ble Court still holds that it is necessary for the Court to examine the relevant material in (1)[1961] I S.C.R. 417.

(2)[1944] F.C.R. 1.

324 order to do justice, then the Board would have no objection to producing the same for the Court's perusal provided it is not shown to the petitioners." It may be mentioned that the Court did not call for this material at all nor did the appellants seek its production. In paragraph 9 Mr. Dutt has categorically stated that the order of May 19, 1965 was passed after careful and independent examination of the material by the Chairman and that it was issued in proper exercise of the powers conferred upon it. He has specifically denied that it was issued at the instance of the second respondent. In paragraph 10 Mr. Dutt has taken the plea that the petition was liable to be dismissed as it had not been made bona fide but for extraneous reasons and to create prejudice with a view to thwart statutory investigation. Then he has set out the circumstances upon which his contention is based. In paragraph 13 he has stated that without prejudice to his submissions in the earlier paragraphs he would reply to allegations contained in the various paragraphs of the writ petition. Then follows paragraph 14 upon which Mr. Setalvad has founded an argument that the grounds disclosed therein being extraneous the order is invalid. In this paragraph Mr. Dutt has admitted some of the facts stated in paragraphs 1 to 19. He has also said that the Board was aware of the fact that the company had entered into collaboration with M/s. L. A. Mitchell Ltd. He has then added:........ but it has no information of any of the other matters and/or negotiations with M/s. L. A. Mitchell Ltd., Manchester. However, from the Memoranda received by the Board referred to in paragraph 5 and other examination it appeared inter alia that:

(i) that there had been delay, bungling and faulty planning of this project, resulting in double expenditure. for which the 'collaborators had put the responsibility upon the Managing Director, Petitioner No. 2:

(ii) Since its flotation the company has been continuously showing losses and nearly 1/3rd of its share capital has been wiped off;

(iii)that the shares of the company which to start with were at a premium were being quoted on the Stock Exchange at half their face value; and (iv)some eminent persons who had initially accepted seats on the Board of Directors of the company had subsequently severed their connections with it due to differences with Petitioner No. 2 on account of the manner in which the affairs-of the company were being conducted. " In paragraph 5 it may be recalled Mr. Dutt has set out the grounds on which the writ petition deserved to be summarily 325 rejected. It will thus be clear that what are characterised by Mr. Setalvad as the grounds upon which the order of the Board is based are nothing more than certain conclusions drawn by the Boar& from some of the material which it had before it. Moreover the expression "inter alia" used by Mr. Dutt would show that the conclusions set out by him specifically are not the only ones which could be drawn from the material referred to by, him in paragraph 5 of his affidavit.

Turning to paragraph 16 of the affidavit we find that Mr. Dutt has clearly reiterated that there was ample material before the Board on which it could and did form the opinion that there were circumstances suggesting that as stated in the order of May, 19, 1965, the business of the company was being conducted with intent to defraud creditors, members and other persons and further that the persons concerned in the management of the affairs of the company had in connection therewith been guilty of fraud, misfeasance and other misconduct towards the company and its members. This paragraph is in answer to paragraph 21 of the writ petition.

It is in that paragraph alone that the appellants had specifically raised the contention that the recital in the order as to the existence of material is not correct and that in point of fact there was no material before the Board to form the said opinion. In this state of pleadings it would not be right to construe the affidavit of Mr. Dutt to mean that the only conclusions emerging from the material before the Board are those that are set out in paragraph 14 of his affidavit.

Apart from this we do not think that the conclusions set out in paragraph 14 are extraneous to the matters indicated in the order of May 19, 1965. What is said therein is that there are circumstances suggesting that the business of the appellants is being conducted with intent to defraud its creditors, members and others, and that. the persons concerned with the management of the affairs of the company have been guilty of fraud, misfeasance and other misconduct towards the company and its members. it has to be borne in mind that what the Board is to be satisfied about is whether the circumstances suggest any of these things and not whether they establish any of these things. Now, the first of its conclusion is to the effect that the materials show that there was delay , bungling, faulty planning of the project and that this resulted in double expenditure for which the collaborators had put the responsibility upon the Managing Director, that is, appellant No. 2. Would it be farfetched to say that these circumstances could reasonably suggest to the Board that these happenings were not just pieces of careless conduct but were deliberate acts or omissions of appellant No. 2 done with the ulterior motive of earning profit for himself ? Similarly could not the fact that the company was continuously showing losses since its flotation and that 1/ 3rd of its 326 share :-capital had ,been wiped out could have been suggestive of fraud to the Board.

In 'this connection, we think it right to point out that the spirit of the section must be kept in mind in determining its interpretation. The section was enacted to prevent the Management of a company from acting in a manner prejudicial to the interests of the shareholders for whom it was difficult, to get together and take steps for the protection of their interests jointly. It was this difficulty of the shareholders-which is a reality-which had led to the enactment of the section. There is no doubt that few shareholders have the means or ability to act against the Management. It would furthermore be difficult for the shareholders to find out the facts leading to the poor financial condition of a company. The Government thought it right to take power to step in where there was reason to suspect that the Management may not have been acting in the interests of the shareholders-who would not be able to take the steps against a powerful body like the Management and to take steps for protection of such interests. As we have said, the section gives the exploratory power only. Its object is to find out the facts., a suspicion having been entertained that all was not well with the company. The powers are exercised for ascertaining facts and, therefore, before they are finally known, all that is necessary for the exercise of the powers is the opinion ,of the Board that there are circumstances which suggest to it that fraud and other kinds of mismanagement mentioned in sub-cls. (i) to (iii) of cl. (b) of the section may have been committed. If the facts do reasonably suggest any of these things to the Board, the power can be exercised though another.

individual might think that :-the ;facts suggest otherwise It cannot be said that from a huge loss incurred by a company and the working of the company in a dis organised and un-businegs like way, the only conclusion possible is that it was due to lack of capability. It is reasonably ,conceivable that the result had been produced by fraud and other varieties of dishonesty or misfeasance. The order does not amount to a finding of fraud. It is to find out what kind of wrong ,action has led to the company's ill-fate that the powers under the sectional given. The enquiry may reveal that the renovation or other similar kind of malfeasance. It would be destroying the beneficial effective use of the powers given by the section to say that the Board must first show that a fraud can clearly be said to have been committed. It is enough that the facts show that it can be reasonably thought that the company's unfortunate position might have been caused by fraud and other species of dishonest action. In our opinion, therefore, the argument of Mr. Setalvad about the circumstances being extraneous cannot be accepted.

Coming to the third point of Mr. Setalvad pointed out that four ex-Directors of the Company who had resigned submitted a 327 memorandum to Mr. T. T. Krishnamachari while he was holding the office of Finance Minister in which grave allegations were made concerning the affairs of the Company and the management of the Company by the second appellant. The investigation, according to Mr. Setalvad. was the outcome of this memorandum and that by ordering it the Board has in effect enabled the ex-Directors who continue to be shareholders to circumvent the provisions of ss. 235 and 236 of the Companies Act. Section 235 deals with "Investigation of affairs of company on application by members or report by Registrar". Clause (a) of this section provides that in the case of a company having a share capital the investigation can be ordered either on the application of not less than 200 members or of members holding not less than one-tenth of the total voting power therein. We are not concerned with cls. (b) and (c). Apparently the four ex-Directors were not holding 10% of the voting power of the Company. At any rate the case was argued on this footing. Section 236 provides that such application has to be supported by such evidence as the Board (reading 'Board' for 'Central Government') may require. It also empowers the Board to require the applicants to furnish security for such amount, not exceeding one thousand rupees as it may think fit, for the payment of the costs of the investigation. The contention is that though the Board acted upon the memorandum submitted by four ex-Directors it did not even require them to comply with the provisions of s. 236. The contention is that the order of the Board appointing Inspectors is invalid. In other words the argument amounts to this that the provisions of s. 237(b) have been utilised by the Board as a cloak for taking action under the provisions of s. 235. In other words this is an argument that the order was made mala fide.

It is true that a memorandum was presented to Mr. Krishnamachari by four ex-Directors containing grave allegations against the two appellants. But it was not solely on the basis of this memorandum that action was taken by the Board.

It is clear from the counter-affidavit of Mr. Dutt and particularly from paragraph 5 thereof that the Board had before it not only two sets of memoranda dated May 30, 1964 and July 9, 1964 respectively from four ex-Directors of the Company alleging serious irregularities and illegalities in the conduct of the affairs of the Company but also other materials. The Board points out that over a long period beginning from September 1961 the Department had been receiving various complaints in regard to the conduct of the affairs of the Company. One complaint had also been received by the Special Police Establishment and forwarded by it to the Department in November, 1963. The matter was enquired into by the Regional Director of the Board at Madras and he, in his report, sent to the Board in September 1964 suggested an urgent and comprehensive investigation into the affairs of the Company. In his /S5SCI-23 328 affidavit the Chairman of the Board Mr. Dutt has stated further in paragraph 5(b) as follows:"The material on the file was further examined in the light of the Regional Director's recommendation by the two Under Secretaries of the Board (Sarvashri M. K. Banerjee C. S. S. and K. C. Chand, I. R. S. at the head.

quarters of the Board in New Delhi and both of them endorsed the recommendation of the Regional Director to order an investigation.

The matter was then considered by the Secretary of the Company Law Board in charge of investigation (Shri D. S. Dang, I.A.S.) and he also expressed his agreement that there was need for a deeper probe into the affairs of the company." Then again in paragraph 5(c) he has stated as follows:"Accordingly, the matter was put up to me at the end of November 1964 and after consideration of all the material on record, I formed the opinion that there were circumstances suggesting the need for action under section 237(b) of the Companies Act, 1956".

It is abundantly clear from all this that the investigation cannot be said to have been ordered either at the instance of the four ex-Directors or on the sole basis of the memoranda submitted by them. There is, therefore, no contravention of the provisions of SS. 235 and 236 of the Act. As a corollary to this it would follow that the order was not made mala fide or is otherwise invalid.

As already stated the appellant had challenged the provisions of S. 237(b) on the ground that they are violative of the fundamental rights under Arts. 14 and 19(1)(g) of the Constitution. Our brother Shelat has dealt with this attack on the provisions fully and we agree generally with what he has said while dealing with the contentions. We would, however, like to add that the company being an artificial legal person cannot, as held by this Court in The State Trading Corporation of India Ltd., v. Commercial Tax Officer Visakhapatnam & Ors.(1),claim the benefit of the provisions of Art. 19(1)(g) though appellant No. 2 Balasubramanian can do so. We agree with our learned brother that the action proposed under S. 237(b) being merely, exploratory in character the fundamental right of Balasubramanian to carry on business is not affected thereby. Since that is so, the question whether the provisions of the aforesaid section are a reasonable restriction on the exercise of the right under Art. 19(1)(g) does not arise for consideration. In the circumstances, therefore, we do not think that there is anything more that we need say.

The last question is whether it was not competent to Mr. Dutt alone to take the decision that an investigation be ordered against the company. In taking the decision Mr.

Dutt acted under a rule 1964] 4 S.C.R. 99.

329 of procedure prescribed in the order dated February 6, 1964.

The validity of this rule is challenged, by Mr. Setalvad on the ground that this amounts to sub-delegation of a delegated power and is ultra vires the Act. Clause (a) of sub-s. (1) of s. 637 read with s. 10(E)(1) empower the Central Government to delegate its powers under s. 237 to the Company Law Board. By notification dated February 1, 1964 the Central Government has delegated, amongst other powers and functions, those conferred upon it by s. 237 upon the Company Law Board. By another notification of the same date the Central Government has made and published rules made by it in exercise of its powers under s. 642(1) read with S. 10E(5) rule 3 of which reads thus:"Distribution of business;-The Chairman may, with the previous approval of the Central Government, by order in writing, distribute the business of the Board, among himself and the other member or members, and specify the cases or classes of cases which shall be considered jointly by the Board." By order dated February 6, 1964 the Chairman of the Company Law Board specified the cases and classes of cases to be considered jointly by the Board and distributed the remaining business between himself and other members of the Board. Amongst the matters allocated to the Chairman is the appointment of an Inspector under s. 237 to investigate the affairs of a company. This, Mr. Setalvad says" could not be done in the absence of an express provision in the Act. In this connection he has referred us to sub-s. 4A of s. 10E which was subsequently added-but not made retrospective-by an amendment of the Act which confers an express power on the Central Government to enable the Chairman to distribute the powers and functions of the Board. According to the learned Attorney-General this provision was enacted only to make what was implicit in s. 10E(5) read with S. 642(1) clear and that the distribution of the work of the Board being merely a matter of procedure the order of the Chairman allocating the power under s. 237(b) to himself did not amount to sub-delegation of the power of the Board.

Bearing in mind the fact that the power conferred by s. 237(b) is merely administrative it is difficult to appreciate how the allocation of business of the Board relating to the exercise of such power can be anything other than a matter of procedure. Strictly speaking the Chairman to whom the business of the Board is allocated does not become a delegate of the Board at all. He acts in the name of the Board and is no more than its agent But even if he is looked upon as a delegate of the Board and, therefore, a sub-delegate vis-a-vis the Central Government he would be as much subject to the control of the Central Government as the Board itself. For sub-s. (6) of s. 10E provides that the Board shall, in S5SCI-23(a) 330 the exercise of the powers delegated to it, be subject to the control of the Central Government and the order distributing the business was made with the permission of the Central Government. Bearing in mind that the maxim delegatus non potest delegare sets out what is merely a rule of construction, sub-delegation can be sustained if permitted by an express provision or by necessary implication. Where, as here, what is sub-delegated is an administrative power and control over its exercise is retained by the nominee of Parliament, that is, here the Central Government, the power to make a delegation may be inferred. We are, therefore, of the view that the order made by the Chairman on behalf of the Board is not invalid.

To sum up, then, our conclusions may be stated thus: The discretion conferred on the Central Government by s. 237(b) to order an investigation and delegated by it to the Company Law Board is administrative, that it could be validly exercised by the Chairman of the Board by an order made in pursuance of a rule enacted by the Central Government under S. 642(1) read with s. 10E(5), that the exercise of the power does not violate any fundamental right of the company, that the opinion to be formed under S. 237(b) is subjective and that if the grounds are disclosed by the Board the Court can examine them for considering whether they are relevant.

In the case before us they appear to be relevant in the context of the matter mentioned in sub-cls. (i) to (iii) of s. 237(b). Though the order could successfully be challenged if it were made mala fide, it has not been shown to have been so made. The attack on the order thus fails and the appeal is dismissed with costs.

Hidayatullah, J. We are concerned in this appeal with the legality of an order of the Chairman, Company Law Board, May 19, 1965, (purporting to be under S. 237(b) of the Companies Act, 1956) declaring that the affairs of the Barium Chemicals Ltd. be investigated. As a consequence Inspectors have been appointed and searches have been made. The Company and its Managing Director filed a petition under Art. 226 of the Constitution in the High Court of Punjab seeking to quash the order and on failure there, have filed this appeal by special leave of this Court. The action of the Chairman was and is challenged on diverse grounds but those which were presented before us were few and clear cut.

The action is challenged as without jurisdiction because not the Board but the Chairman alone acted, as mala fide because no honest opinion was formed on the matters which under the section give rise to the power but on irrelevant and extraneous material, and further because the order was passed under the influence and malice of a Minister of Cabinet who was interested in another Company belonging to his sons and sought this means to oust a rival.

The facts have been stated already in some detail by my brother Shelat and I need not take time in restating them.

My 331 order proposed by him but as I view the matter a little differently on some of the aspects of the case, I wish to record my reasons briefly.

Under the Companies Act 1956, a power of superintendence over the affairs of Companies is retained by the Central Government in much the same way as the Board of Trade in England exercise over Companies in that country. This power is of two kinds (a) calling for information or explanation from the Company and (b) ordering an investigation into the affairs of the Company by appointment of Inspectors for inspection, investigation and report. The power is not only varied but is capable of being exercised variously. The power to call for information is conferred on the Regisrar in two different ways. Firstly, jurisdiction is conferred on the Registrar by s. 234 to call for information or explanation in relation to any document submitted to him, which information or explanation must be furnished