M/S. Shakti Trading Company Pvt. Ltd. & Anr. Petitioners v. Union Of India And Another S

B.N Kirpal, J.:— The petitioners, who are share-holders of W.H Brady & Company, (hereinafter referred to as ‘the Company’) have filed this petition under Article 226 of the Constitution seeking to challenge the orders of the respondents under section 408 of the Companies Act, whereby 5 persons have been appointed as Directors of the said Company.

2. Prior to 25th June, 1953 the Company had 6 directors. The principal share-holders of the Company were Gokul Chand Morarka and members of his family. Gokul Chand Morarka as well as petitioner No. 2 Gangaprasad Morarka and Bajranglal Morarka were Directors of the said Company.

3. On or about 25th June, 1973 the Company Law Board (respondent No. 2) issued a show cause notice under Section 408 of the Act requiring the Company to show cause as to why Government Directors should not be appointed on the Board of Directors of the Company. The main allegation in the show cause notice was that the Company had given substantial loans to Mr. K.M Choksey, B.M Choksey & Co. and N.R Aggarwal, all of whom were share-brokers. Besides this, one Mr. B.P Roongta, another share-holder, was also given a substantial loan. It was further alleged that these persons seemed to have advanced substantial loans to certain other Companies which had been closely held by Morarkas, who were in Management control of W.H Brady & Co., and that the said brokers were only acting as cover to the transaction between the Company and the other Companies controlled by Morarkas. It was stated in the show cause notice that the transaction and the other features mentioned therein indicated that the affairs of the Company were being conducted in a manner oppressive to its members, and prejudicial to the interests of the Company and the Public.

4. Before any order could be passed under section 408, Gokul Chand Morarka died on 18th October, 1973. In his place his son Pavan Morarka was appointed as a Director on 1st November, 1973. He ceased to be a Director with effect from 30th September, 1974 on his having tendered his resignation.

5. By order dated 2nd January, 1974 the Company Law Board, in exercise of its powers under section 408 (1), appointed two Directors, namely, Shri S.A Aiyer and Shri Dara P, Mehta for a period of three years. It may here be noted that at that time section 408 (1) enabled the Company Law Board to appoint not more than two Directors on the Board of a Company.

6. On 27th September, 1975 the said Shri D.P Mehta filed application to the Central Government under section 409 of the Act in respect of certain resolutions for removal and appointment of Directors on the Board of Directors of the Company. No order was admittedly passed on this application. Thereafter, on 17th November, 1975 the Company filed an application to the Central Government under Sections 247 and 250 of the Act for appointment of an Inspector to investigate the membership of the said Company.

7. The Company Law Board, by its order dated 24th March, 1976, passed under section 247 of the Act, appointed Shri Bansi Mehta, a Chartered Accountant as an Inspector for the purpose of carrying out the above-mentioned investigation. It appears that one of the Government Directors, namely, Shri S.A Aiyer was not happy with this appointment. According to the petitioners, Shri Aiyer wrote a letter dated 3rd April, 1976 to Shri Dara Mehta protesting against the appointment of the said Inspector. This was followed by the resignation of Shri Aiyer on 1st June, 1976. In his place the Company Law Board, on 19th August, 1976, appointed Shri V.S Jaitely as Director of the Company. In the meanwhile Shri Bansi Mehta completed his inrestigation and submitted his report dated 4th July, 1976.

8. The term of the Government appointed Directors was coming to an end with effect from 2nd January, 1977. The Company Law Board, prior to that date, issued a show cause notice dated 7-12-76 to the Company under section 498 (1) of the Act. The Company was asked to show cause as to why the Directors should not be appointed by the Government on the Company's Board. Soon after the receipt of the said notice Shri G.D Morarka filed writ petition in the Bombay High Court challenging the said show cause notice. By order dated 23rd December, 1976 the petition appears to have been dismissed on the ground that it was pre-mature. Soon thereafter, by order dated 31st December, 1976, the Company Law Board appointed 5 persons as Directors of the Company under section 408 (1) of the Act. The ground for passing the order was the same, namely, to prevent the affairs of the Company from being conducted in a manner prejudicial to the interests of the Company, its employees and to the public interest.

9. In August, 1978, the Company filed a suit in the Bombay High Court being Suit No. 1093 of 1978 against petitioners and other persons being the share-holders of the Company, holding in the aggregate about 55,388 ordinary shares.

10. In the suit it was, inter alia, alleged that the said shares were acquired by the respective share-holders by use of the funds of the said Company. The allegation was that the Morarkas and the Companies controlled by them had purchased the controlling interest of the shares from the group controlled by the members of the family of Pallonji Shapurji Mistry. The purchase price of these shares was alleged to have come out of the loans which had been advanced by the Company to the aforesaid share-brokers and petitioner No. 1, which was a Company in the Morarka Group. Reference in the plaint was made to the report of Shri Bansi S. Mehta and it was alleged that he had come to the finding that by resorting to circuitous methods, the funds of the Company had been used for acquiring its own, shares so as to promote the control of the Morarka Group. It was also alleged that the ostensible share-holders held shares for the benefit of the Company and that the real ownership of the shares held by petitioner No. 1 and by late Shri G.D Morarka were held by them in trust for the Company. It was also stated that there had been a blatant violation of the provisions of Section 77 of the Companies Act, as the funds of the Company had been utilised for the purchase of its own shares. Various prayers were made in the plaint including the prayer that it should be declared that the shares of the Company held by the respective defendants to the suit should be declared to be belonging to the Company. It may here be noted that this prayer that it should be declared that the plaintiff-Company was the real owner of the said shares, was deleted when an application under Order 6 Rule 17 for amendment of the plaint was allowed by Bombay High Court. By virtue of the amendment two more prayers, had been added. One prayer which was added was that it should be declared that the loans which were given were ultra vires the objects of the Company and were illegal, void and bad in law, and the other prayer which was added was for a declaration that the shares held by the defendants therein were held by them on trust for and on behalf of the Company and that the Company was entitled to a charge on and to follow the said trust property in the hands of the defendants. It is not necessary, at this stage, to refer to the other prayers in the plaint.

11. Along with the suit the Company had also filed an application, for interim injunction, in which it was, inter alia, prayed that the defendants should be restrained from exercising their voting rights in respect of the shares which were the subject-matter of the suit. In August, 1978 this injunction was not granted.

12. The Company Law Board then sent a telegraphic notice dated 16-12-1978 to the Company asking to show cause why Government Directors should not be appointed under section 408 (1) of the said Act for the period beyond 1st January, 1979. This was followed by another telegraphic notice dated 16th December, 1978 whereby the Company Law Board required petitioner No. 2 to show cause why Government Directors should not be appointed under section 408 (1) of the Act and which required the said petitioner to appear before it on 20th December, 1978.

13. In response to the said show cause notice the Company, which was in effect being managed by the Government Directors, inter alia, submitted its reply dated 18th December, 1978. It represented that if the Government Directors were not appointed for a fresh term, the result would be that the suit filed by it against the Morarka Group will be abandoned and allowed to be dismissed in default. Petitioner No. 2, on the other hand, contended that there was no justification for Government Directors being appointed under Section 408. However, on 1st January 1979, the Company Law Board, in exercise of its powers under section 408 (1) of the Act, appointed the same five persons, who were on the Board of Directors of the Company, as Government Directors for a further period of three years with effect from 2nd January, 1979. By the said order Shri Dara Mehta was appointed as the Chairman of the Board of Directors. In the order it was further stipulated that the Board had decided that the order would be reviewed either suo motu or at the instance of any other party in the event of the aforesaid Suit No. 1093 of 1978, filed by the Company in the Bombay High Court, being disposed of during the tenure of the Government Directors. Detailed reasons for the said order, which was passed, were also communicated by the Company Law Board. The main reasons, which were stated by the Board for appointment of the Directors, were as follows: —

“On this question, it is an admitted fact that there is a suit pending in the Bombay High Court in which the Company is the Plaintiff. In the suit, there is a prayer for a declaration that the shares of the Plaintiff Company held by certain defendants are held by them for the benefit of the Plaintiff Company and that the Plaintiff Company is the real owner of such shares. The subject-matter of this prayer pertains to 55,834 shares out of a total of 80,000 shares. According to 65th Annual Report of the Company, 80,000 shares were issued at Rs. 150 per share fully paid. Going by this, it is clear that the ownership of a very substantial part of the shares of the Company is itself under dispute before the Bombay High Court. There can be no doubt about the fact that the Company is very directly and materially interested in determining the ownership of these shares. It has already taken steps for this purpose by filing the suit before the Bombay High Court. It is absolutely necessary in the opinion of the Board that the suit has to be prosecuted with due diligency and care before the High Court by placing all the materials available before the Court for a judicial and correct determination of the dispute. Such a step can be ensured only by the continuance of the Government Directors, who have no personal interest in the shares. On the other hand, if the control of the company vests in the Morarka Group, there is every likelihood of their abandoning the suit or conducting the same in a way which will be against the Company. They stand to gain substantially by the dismissal of the suit or by an abandonment thereof. The position in respect of the garnishee proceedings is also identical. In the opinion of the Board, this reason is sufficient enough to justify the continuance of the appointment of Government Directors on the Board. In the Board's opinion this view is particularly justified in view of the fact that the future control of the Company depends very substantially on the result of the suit. It will be idle to expect a few minority shareholders to get themselves involved in a litigation of this magnitude where they stand to gain very little, particularly when their share value will not justify the expenditure that they are likely to incur. The activities of the Company in the future will very much depend upon who is in control of the Company. In view of this the Board is of the opinion that there is sufficient public interest to justify the appointment of Government Directors, apart from the interest of the Company itself, which also is sufficient enough to justify such an action. The Board also is of the opinion that the employees' Cooperation will be forthcoming in an abundant measure only if Government Directors continue to control the affairs of the Company. At this juncture when the Company has started making profits, without their cooperation, the future running of the Company will be in a serious jeopardy. The employees have also made a request that the Government Directors must be continued and that the Morarkas should not be allowed to step in. Therefore, in order to ensure that the employees' cooperation will be available sufficiently to make the working of the Company smooth in the future, the Board finds it necessary to appoint Government Directors. The Board has also noted that apart from the Government Directors, the two non-Government Directors Sarvashri Setalvad and Diwanjee have also supported the request for continuance of the Government Directors.

“The Government Directors have been appointed only for a period of three years, with effect from 2nd January, 1979. As already mentioned in the order dated 1-1-1979, if during this period the suit in the Bombay High Court is finally decided, the Board either on its own motion or at the instance of interested parties, will, review the situation and pass further orders regarding the continuance or otherwise of the Government Directors on the Board of the Company.”

The aforesaid order under section 408 was challenged by Shri Gangaprasad Morarka in a writ petition filed in the Bombay High Court. The said writ petition being No. 552 of 1979 was admitted but no interim relief was granted.

14. The Company Law Board then issued a show cause notice dated 29th October, 1981 to Petitioner No. 2 under notice dated 29th October, 1981 to Petitioner No. 2 under the current tenure of the Government Directors would expire on 1st January, 1982. The said petitioner was asked to indicate as to why the Government Directors should not be appointed for a period beyond Ist January, 1982. A reply dated 16th November, 1981, by the petitioners' Advocate, was sent to the Company Law Board. It was, inter alia, contended that the said notice dated 29th October, 1981 was illegal and void, inter alia, on the ground that the same was vague and the condition precedent to the exercise of powers under section 408 of the Act had not been satisfied. It was also alleged that the said notice did not disclose the ground on which action was proposed to be taken under section 408 of the Act and thereby the petitioners were being deprived of an effective opportunity to make the representation.

15. On or about 2nd December, 1981 a writ petition was filed in this Court by the petitioners challenging the said show cause notice. It was, inter alia, contended that no reasons had been given in the show cause notice. By order dated 3rd December, 1981 this petition was dismissed on the ground that it was pre-mature. It was, however, observed by this Court as follows: —

“We are quite sure that if the petitioner want further information, they can ask the same and the Company Law Board, which is aware of the law applicable to such matters, will supply them with the information which the petitioners are entitled to under the law. . . . . . . .”

16. The petitioners then received a notice from the Company Law Board informing them that the case would be heard on 10th December, 1981. At the hearing, which took place on that date, it was, inter alia, submitted by the counsel for the petitioners that the grounds and material on the basis of which the show cause notice dated 29th October, 1981 had been issued had not been supplied to the petitioners. It was also represented that the counsel for the petitioners was entitled to know what were the representations made to the Company Law Board by the Company. According to the averment in the petition, it is alleged that the Chairman of the Company Law Board had assured the petitioners' counsel that the grounds on the basis of which the show cause notice was issued, as well as copies of the replies and/or representation and other material on which the proposed action was based, would be furnished to the petitioners and the petitioners were directed to send their representative on 14th December, 1981 to collect the same from the Company Law Board. The petitioners were also permitted to file a written reply or submissions by 21st December, 1981.

17. On 14th December, 1981 the Secretary of the Company Law Board delivered to the petitioners' representatives 11 documents as per the list. The Advocate for the petitioners wrote a letter dated 14th December, 1981 to the Secretary of the Company Law Board. While acknowledging receipt of the said 11 documents, it was, however, represented that the papers supplied did not include the grounds on the basis of which the Company Law Board had issued the show cause notice dated 29th October, 1981. It was contended that unless the said grounds were furnished the petitioners would not know what case they had to meet and the next date of hearing would become meaningless. Request was again made for the supply of the grounds.

18. No communication was received from the Company Law Board in response to the aforesaid letter having been written by the petitioners' Advocate. The petitioners, nevertheless, did file a reply to the said show cause notice. It was, inter alia, contended that the principles of natural justice have been violated as the show cause notice did not contain the grounds on the basis of which the same had been issued. By their letter dated 16th December, 1981, the Company also filed further written submissions. On 24th December, 1981 the Company Law Board heard the case. By order dated 29th December, 1981 the Company Law Board recommended the appointment of five Directors on the Board of the Company for a period of three years with a direction that the order would be reviewed if the suit No. 1093 of 1978 pending in the Bombay High Court was decided. This was followed by order dated 1st January, 1982 of the Central Government whereby three Government Directors were appointed. By another order of the Central Government dated 14th January, 1982 two more Directors were appointed. The Company Law Board, by an order dated 14th January, 1982, under Section, 408 (6) of the Act, directed the appointment of Shri V.S Jaitley as the Chairman and Shri M.F Dhanboora as the whole-time Director.

19. The petitioner's Advocate, by the letter dated 2nd January, 1982, had requested the Company Law Board to furnish the reasons on the basis of which the said order was passed. Along with its letter dated 27th February, 1982, the Company Law Board forwarded a copy of the reasons for the order dated 29th December, 1981.

20. In the present writ petition, which has been filed, after it was allowed to be amended, the challenge is to the validity of the aforesaid orders dated 29th December, 1981 and 1st January, 1982 passed by the Company Law Board and the Central Government.

21. It was contended by the learned counsel for the petitioners that an order under section 408 of the Act can be passed only in order to prevent the majority shareholders from missing and/or abusing their rights and powers as majority shareholders. It was submitted that such a construction is compelled by the reading of the proviso to the said section. In other words, the true scope and ambit of section 408 is inducted by the proviso. It was submitted that if reference is made to the other provisions of the Act contained in Chapter VI, it would appear that the powers under section 408 can only be exercised only in order to prevent oppression or mismanagement by the majority shareholders.

22. Chapter VI of the Companies Act contains provisions for prevention of oppression and mismanagement. Section 397 to 407 deal with the powers of the Court to give relief while sections 408 and 409 confer powers on the Central Government.

23. In cases where oppression is alleged, the members of the Company can apply to the Court under Section 397 of the Act. If the allegation is of mismanagement, then an application can be moved under section 398. Under Section 397 the Court has jurisdiction to pass appropriate orders if it is of the opinion that the affairs of the Company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member or members. Under Section 398 the power is to be exercised by the Court if it is of the opinion that the affairs of the Company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company or material changes that have taken place in the management or control of the company and by reason of such a change it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company. Not only is the right under section 399 to members of the company to apply to the Court but under section 399 (iv) the Central Government has been given right to authorise any member or members to apply to the Court under section 397 or 398 of the Act even if those members do not hold the requisite number of shares as specified in Section 399 (i). Apart from this, under section 401 the Central Government has got the powers to itself apply to the Court for an appropriate order under section 399 or 398 of the Act. By virtue of Section 400 whenever an application is filed under section 397 or 398 of the Act, the Court is obliged to give notice of the same to the Central Government. If an order is to be passed under section 407 (i) (b) whereby certain appointments are terminated or agreement set-aside, then again notice is required to be given by the Court to the Central Government. The reading of these sections makes it clear that no action can be taken by the Court under section 397 or 398 read with section 402, which sets out the specific powers which the Court can exercise without prejudice to the generally of the powers contained in section 397 or 398 without giving adequate opportunity to the Central Government to make submissions before the Court. The powers of the Court under section 397 or 398 read with section 402 are of the widest amplitude. These powers, however, cannot be exercised without hearing the Government, even if the Government itself has not filed or authorised the filing of an application under section 397 or 398 of the Act.

24. Sections 408 and 409 on the other hand, contain the powers of the Central Government which are to be exercised if the conditions contained therein are satisfied. The conditions prescribed by section 408 are similar to those of section 397, whereas the provisions of section 409 are analogous to section 398. Relevant provisions of section 408 and 409 are as fallows: —

“408 (I) Notwithstanding anything contained in this Act, the Central Government may appoint such number of persons as the Central Government may, by order in writing, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interest to hold office as directors thereof for such period, not exceeding three years on any one occasion, as it may think fit, if the Central Government, of its own motion or on the application of not less than one hundred members of the Company or of members of the company holding not less than one-tenth of the total voting power therein, is satisfied, after such inquiry as it deems fit to make that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest. Provided that in lieu of passing an order as aforesaid, the Central Government may, if the Company has not availed itself of the option given to it under Section 265, direct the company to amend its articles in the manner provided in that section and make fresh appointments of directors in pursuance of the articles as so amended, within such time as may be specified in that behalf by the Central Government.

(2) In case the Central Government passes an order under the proviso to sub-section (i), it may, if it thinks fit, direct that until new directors are appointed in pursuance of the order aforesaid, such number of persons as the Central Government may, by order in writing, specify as being necessary to effectively safeguard the interest of the company, or its shareholders or the public interest specified by the Central Government shall hold office as additional directors of the company.

(5) No change in the Board of directors made after a person is appointed or directed to hold office as a director or additional director under this section shall, so long as such director or additional director holds office, have effect unless confirmed by the Central Government.

(6) Notwithstanding anything contained in this Act or in any other law for the time being in force, where any person is appointed by the Central Government to hold office as director or additional director of a company in pursuance of sub-section (i) or sub-section (2), the central Government may issue such directions to the Company as it may consider necessary or appropriate in regard to its affairs. . . . . . 409. (1) where a complaint is made to the Central Government by the managing director or any other director, the managing agent, the secretaries and treasurers or the manager, of a company that as a result of a change which has taken place or is likely to take place in the ownership of any shares held in the company, a change in the Board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Central Government may, if satisfied, after such inquiry as it thinks fit to make that it is just and proper so to do, by order, direct that no resolution passed or that may be passed or no action taken or that may be taken to effect a change in the Board of directors after the date of the complaint shall have effect unless confirmed by the Central Government; and any such order shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in the memorandum or articles of the company, or in any agreement with, or any resolution passed in general meeting by, or by the Board of directors of the company.”

25. If the majority shareholders act in manner which is oppressive to the minority then it is one of the circumstances which can be taken into consideration by the Central Government, while exercising its powers under section 408. We are however, unable to agree with the learned counsel for the petitioners that that is the only circumstance which is to be taken into consideration while exercising such a power. The plain reading of the aforesaid provisions show that when the affairs of the company are conducted in a manner prejudicial to the interest of the company or to public interest or in a manner which is oppressive to any members of the company, the Central Government has power to take action under section 408. If the majority shareholders carry on business in the manner which results in earning profits for the company and is not oppressive to the minority shareholders, but, at the same time the manner in which the business is carried on is such that it is prejudicial to the public interest then under section 408 the Central Government can certainly exercise its powers and appoint directors of the company. The proviso to section 408 (1) does not in any way limit or control the power of the Central Government to act when affairs of the company are being conducted against the interests of the company or public interests. The proviso to section 408 (1) gives the Central Government the power to pass an order directing the company to amend its articles so as to provide for appointment of directors by proportional representation instead of the Central Government itself passing orders appointing directors. The condition for acting under the proviso remains the same, namely that the affairs of the company are being conducted in a manner oppressive to any members of the company or in a manner which is prejudicial to the interest of the company or to public interest. The bare reading of the proviso shows that the Central Government may, under certain circumstances, come to the conclusion, where the conditions set-out in section 408 (1) exists, that it is not necessary to appoint Government directors and it would be sufficient to direct the company to amend its articles in the manner indicated in section 265 and to make appointments in pursuance of the said amended articles. There is no conflict between the substantive provisions or section 408 (1) and the proviso to warrant our coming to the conclusion that the powers under section 408 (1) can be exercised only in the case of oppression on the minority shareholders by the majority. Nor is there any ambiguity in the language employed in section 408 (1) which necessitates our taking the help of the proviso in order to interpret the said provisions.

26. The essential difference in the powers of the Court contained in sections 397 and 398 and the powers of the Central Government contained in sections 408 and 409 is that whereas the Court can pass various orders under sections 397, 398 and 402, including the orders which result in amendment of the articles of association, termination and setting aside of agreements, regulating the conduct of the company's affairs in future etc., the Central Government, however, under section 408 can only order the appointment of directors to the Board. The powers of the Central Government under Sections 408 and 409 are preventive in nature. The powers are exercised in order to see that in future the affairs of the company are conducted in a manner which are not prejudicial to the interests of the company, its members or to the public interest. An order under section 408 may not be able to cure the illegal or prejudicial acts which may have already been performed by the company and its directors, but it can try and prevent repetition of such acts in future, by appointing the Directors of the Company. The aforesaid provisions were also considered by a Division Bench of this Court in the case of Vinod Kumar v. Union of India and others, (1982) 52 Company Cases 211 (1). The head note, which clearly, brings out the ratio of the judgment, reads as under: —

“The power of the Central Govt., under the enabling provision of S. 408 of the Companies Act, 1956, is analogous to the power of an court u/ss. 397 and 398 appearing under the same heading and Chap. VI “Prevention of oppression and mismanagement”, by which it could appoint directors to the Board of an company. The power is great, but as it stands it is not unlimited, being subject to the limitations to be found in the last portion of sub-s. (1) whereunder the Government has to be satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent a management of the affairs of the company, which words show that the conditions to be satisfied before making the order are similar to the conditions which have to be satisfied before the court exercises its powers u/ss. 397 and 398.

The wording of s. 408 shows that it works in a preventive manner on the existence of certain preconditions and comes to an end by lapse of the statutory period. After that, the Government has to pass a new order and it can do so only under the powers given by the section, which means that such inquiry as thought fit has to be held and the necessary preconditions visualised by the section had to exist. Initially, if mismanagement or oppression exists, or the functioning of the company is prejudicial to the interest of the company or public interest, etc., then the conditions for passing the order are immediately established. Once the order is passed, the control of the company passes to a Board appointed by the Central Govt. Now, there can be no mismanagement, there can be no oppression and there can be no functioning of the company prejudicial to the public interest or to the shareholders of the company. This is because the control is now with the Government directors. But the question on the situation, which has to be viewed from quite a different standpoint, would be whether the removal of the Government directors would make the company revert to the situation which existed earlier, or bring about some other situation which would or could cause jeopardy in the smooth working of the company.”

We are in complete agreement with the aforesaid observations. In our view, therefore, power under section 408 can be exercised not only with a view to prevent the majority shareholders from exercising or abusing their rights or powers but also for other reasons, as indicated above. From the aforesaid observations it is also clear that if the Government is of the opinion, which opinion has to be formed after taking into consideration all relevant facts, that allowing the previous management to take over the company would be prejudicial to the interest of the company or the general public then, even if at the time when the order is passed the company is being managed properly, the Government directors can be re-appointed.

27. It was then contended that one of the main reasons that the impugned order has been passed was that suit No. 1093 of 1978 has been filed by the Government against the Morarkas and the said suit is pending in the Bombay High Court.

According to Mr. Salve the nature of the suit is such that no prejudice would be caused to the company, at this stage, even if the suit is withdrawn so as to warrant an order under section 408 being passed. In this connection, it was further urged that the company had earlier filed, suits against the brokers for the realisation of money, except against Choksey Brothers, and the said suits have been decreed. Further money has been received back by the company, except from Choksey Brothers to whom loans have been advanced against security, and the Central Government erred in excluding from consideration these material facts. It was also submitted that no prima facie case has been made out in the suit and the reliefs prayed for, even after the amendment of the plaint, cannot be granted.

28. The filing of a suit against erstwhile management of the company cannot, by itself, be a ground for passing an order under section 408. What is important is to see the nature of the allegations which are contained in the suit. It is not possible to lay down a universal rule that the allegations contained in the suit are relevant or irrelevant. Each case must be decided on its own facts. Where serious allegations are made in a suit against the erstwhile management, and the suit has been filed bona fide and not for any ulterior purpose, then it cannot be said that taking into consideration by the Government of the allegations contained in the suit would be irrelevant.

29. If the allegations contained in the suit are frivolous or of trivial nature then, possibly, the Central Government may not be justified in passing an order under section 408. The Government, however, would be justified in passing such an order if there are serious allegations which are being made in the suit against the former directors or majority shareholders. Such allegations made therein would be relevant circumstances which can be taken into consideration by the Government before it passes an order under section 408 of the Act.

30. It will not be proper for a Court, which is not trying the suit, to adjudicate upon the merits of the said suit but when an order under section 408 has been challenged, like in the present case, this Court will have to decide whether the suit filed in the Bombay High Court is frivoluous or is one on which, on the face of it, has no chance of success. If the Bombay suit has not been instituted for a mala fide reason or ulterior purpose then we would have to see that, if the facts alleged are proved, is there a possibility of the said suit being decreed and if it is decreed what would be its effects on the company. This exercise has to be a very limited one. This Court cannot go into the correctness of the facts alleged in the plaint. The facts as alleged have to be assumed as correct, unless on the face of the suit it is apparent for it can be demonstrated that false averments have been made.

31. After reading the amended plaint filed in the Bombay High Court, we are unable to persuade ourselves to come to the conclusion that the suit filed by the company is frivolous or is one which is bound to fail. Shortly put, the averments in the plaint are that the Morarka Group purchased the controlling interests of the company by purchase of shares from Pallonji Group. The cost of the shares acquired by the Morarka Group upto the end of 1969 amounted to Rs. 63.95 lacs. The loans which were advanced by the company to the brokers were more than this amount. It is clearly averred that the loans granted by the company were utilized for the purpose of acquisition of the shares of the company. Apart from pleading that share-brokers were merely Benamidar of the petitioner-company and other concerns and members of the Morarka Group, it was specifically alleged as follows: —

“The plaintiffs, therefore, submit that the said shares were acquired by the defendants “as a direct consequence of the said ultra vires loans and that therefore the said shares have been and ire held by the defendants on trust on and for and on behalf of the plaintiffs”. The plaintiffs submit that they are entitled in law to a charge on and to follow the trust property in the hands of the defendants and submit that an order and decree be made declining the plaintiffs to be so entitled.”

One of the reliefs claimed in the suit is for a declaration that the loans were ultra vires he objects of the company and it be further declared that the said shares were held by the defendants on trust for an on behalf of the company. Another relief claimed was that the company should be authorised to allot the said shares to any person selected by the Board of Directors of the Company. Reference was also made in the plaint to the report submitted by Mr. Bansi Mehta and, in particular, to that portion of the report wherein it has been stated that the funds of the company have been utilised by the petitioners herein for acquiring the shares of the company in blatent violation of section 77 of the Act. Another reference made in the plaint is to that passage in Bansi Mehta's report wherein it has been stated that the Morarkas have utilised the funds of the company to acquire its control and that when the acquisition of shares of the company begain G.D Morarka was its Chairman and he seems to have used his position to arrange for the grant of loans for acquiring the shares of the company and the control thereof. Reference is also made in the plaint to section 82 of the Trust Act.

32. As already observed by us, we would not like to go into the merits of the suit in great detail. It, however, appears to us that it cannot be said, that the said suit is frivolous or mala fide. If the facts alleged in the plaint ore proved, it is possible for a Court of competent jurisdiction, which is trying the suit, to come to the conclusion that the Directors of the Company who were holding the company's funds in trust, abused their position and granted loans solely with the object of enabling the purchase of shares by the said money. If the funds held in trust are so utilised then it is possible that the Court trying the suit may come to the conclusion that the property acquired from such funds legally and legitimately belongs to the Company whose funds had been utilised for the purchase of the shares. Further, the Court may direct the restoration of the property to the company and simultaneously permit the company to sell the said shares to other persons. If the suit is, thus, decreed it will mean that the Morarkas would not be having majority of the shares in the company and would obviously not be entitled to have control of the Board of Directors. The Government would be justified in coming to the conclusion that if action is not taken under Section 408 then it would certainly be to the interest of the Morarkas Group to see that the said suit is not properly pursued and is dismissed. The success of the suit would mean the complete ouster of the Morarkas from the company. It was imperative, therefore, to ensure that the said suit is properly and diligently pursued and till the same comes to an end there could be no question of handling over the reigns of the company in the hands of the defendants to that suit, namely, the Morarkas. In this view of the matter, the Central Government was not wrong in observing that the fact that some of the loans had been returned by the company was not relevant. What is of importance is whether the shares were purchased out of the funds provided by the company or not. If the shares were purchased out of the funds of the Company, which funds were held in trust by its Directors, then subsequent return of the loans may not alter the position, namely, that the assets purchased from the Company's funds really belonged to the company and it was entitled to the restitution thereof.

33. It was also contended that the other reason contained in the impugned order was that the employees' cooperation would be forthcoming in abundant measure only if the Government directors continue to control the affairs of the company. It is submitted that this is a wholly irrelevant and an extraneous consideration. We are unable to accept this submission. If there is no cooperation by the employees with the management, then it is not difficult to visualise that the smooth working of the company would be adversely affected. Constant friction between the two is bound to disrupt the company's working. It cannot, therefore, be said that the threat of non-co-operation by the employees in the event of the company being allowed to be run by Morarkas, was an irrelevant consideration. It may be that, by itself, the said threat of non-cooperation may not have persuaded the Central Government to pass an order under section 408 but coupled with the fact that allegations of irregularities having been committed in the grant of loans and purchase of shares from the said funds, the Central Government rightly took into consideration the fact that there was a possibility of employees' non-cooperation in the event of the Government not passing an order under section 408 of the Act.

34. It was also contended that relevant material has not been considered by the Central Government and on this ground alone the impugned order stand vitiated. In this connection it was submitted that the Central Government has observed in its order that it was not relevant to consider the statements made by the Secretary in his affidavits filed in the suits against the brokers and nor was it relevant to take into consideration the fact that about rupees forty two lacs have been recovered by the Company from the said parties. In our opinion, the Central Government was right in observing that these questions would be relevant in the trial of the suit and may have to be decided by that Court. As far as the Company Law Board is concerned all that it had to consider was as to whether the pendency of the suit, wherein serious allegations had been made against the defendants, justified the passing of an order under Section 408 or not. If the allegations in the plaint are ultimately substantiated, it is possible for that Court trying the suit to come to the conclusion that the return of the loans was of no consequence and the shares which had been purchased, if they were out of the money provided by the Company, would in law be regarded as being the property of the Company, by virtue of the provisions of sections 82 and 88 of the Trust Act. In this view of the matter, no serious objection can be taken to the Government not considering the said circumstances as being relevant. From the facts available on record, it appears that all relevant material was taken into consideration before the passing of the impugned order.

35. Originally, under Section 408 the Government could appoint not more than two Directors. By virtue of the amendment made in the Companies Act, 1974 the Government has been given the power to appoint such number of persons as directors as may be necessary to effectively safeguard the interests of the company, or its share-holders or the Public interest. The contention of Mr. Salve is that on a correct reading of the section, the Government has a limited power to appoint only such number of persons as may be necessary to carry out the purpose of the said section. It was submitted that the order under Section 408 has been passed primarily with a view to see that the suit filed in the Bombay High Court is properly pursued. As such, it was submitted, it was not necessary to appoint as many as five directors on the Board. The unreasonableness of the action, it was eloquently contended, is borne out from the fact that under sub-section (6) of section 408 the Central Government has the power to issue directions and if only two directors have been appointed the Government could still see and ensure that the company did not act in a manner prejudicial to the interests of the share-holders etc. by issuing necessary directions under section 408 (6) of the Act. It was alleged that this aspect was strenuously urged on behalf of the company but the Central Government has overlooked and ignored the same.

36. As we read the order of the Central Government, it appears to us that the mere fact of the filing of the suit is not the only reason why the impugned order has been passed. The real reason is that if the suit, which has been filed, succeeds then the Morarkas would cease to hold the majority of the shares and, as such they would not be entitled to have management and control of the company. The day to day management of the company is carried on under the control of the Board of Directors. In a case like the present, where there is a cloud over the share-holding and, consequently, the eligibility of the Morarkas to be the directors of the company, the same would be a relevant circumstances to be considered while deciding as to how many directors should be appointed by the Government. As such it is difficult to persuade ourselves to hold that the decision that the majority of the directors should be appointed by the Government can be regarded as unreasonable or perverse. It may here be noted that according to the Articles of Association of the Company the maximum number of directors, who can be on the Board are nine. Therefore, in order to retain the control over the company, the majority of the directors had to be nominated by the Government. It is true that when directions are issued under Section 408 (6) the same have to be complied with, but that may not, by itself, be adequate protection against the possible prejudicial acts which may be performed by the Board, if it is allowed to be controller by majority of the directors appointed by the Morarkas.

37. We are also unable to agree with the contention that the Government did not consider and decide the question with regard to the number of directors who should have been appointed. It is true that the order the Central Government is not as happily worded as it could have been. The Central Government, however, has in its order observed that the control of the company cannot be allowed to vest in the Morarka Group and in its opinion, there was sufficient reason to justify the continuance of the appointment of the Government Directors on the Board. It is quite obvious that if only two directors or less than 5 directors were appointed by the Central Government then the control of the company would vest in the Morarka Group; because the remaining number of directors could have been appointed by the company in general meeting wherein the Morarkas were admittedly the majority shareholders. Therefore, when the Government in its order states that there was justification for the continuance of the control of the company in the Government directors, it is obvious that the Government was of the view that the majority of the directors had to be those who are appointed by the Government.

38. There can be little doubt, and indeed it was not disputed by the learned counsel for the respondents, that when an order under section 408 has to be passed by the Central Government, the Principles of natural justice have to be complied with. It is immaterial whether such an order is being passed for the first time or an order is proposed to be passed for the continuance of the directors already appointed. When the appointment is being made for the first time or the directors already appointed are being continued, the right of the majority of the shareholders to appoint their own directors on the company is obviously adversely affected. At both times, therefore, the Government has to comply with the principles of natural justice before it can pass a valid order under section 408 (1) of the Act. The facts which existed at the time when the original order was passed may not be there at the time when the directors are sought to be continued by the passing of a fresh order. Each time when an order is passed, the Government will have to give an adequate opportunity to the affected parties to show cause as to why the Government Directors should be appointed or reappointed.

39. In this context it was contended by Mr. Salve that in the present case the show cause notice dated 29th October, 1981, which was issued by the Central Government, was very vague. The allegation is that the show-cause notice did not contain any reasons as to why it was proposed to appoint Government directors. It is alleged that despite repeated requests being made by the petitioner, the respondents did not disclose the grounds on which the order was sought to be made.

40. There can be little doubt with the proposition, as con tended by the learned counsel for the petitioner, that the principles of natural justice required that any order which has civil consequences on the rights of the parties should be supported by sufficiently clear and explicit reasons. Not only this, the affected party should be given an adequate opportunity of showing cause against the proposed action. It is obvious that an effective opportunity can be availed of only if the party knows the reasons which are being taken into consideration by the Central Government for the passing of an order under section 408 of the Act.

41. Whether an adequate opportunity has been granted or not depends upon the facts of each case. In order to decide whether in the present case the principles of natural justice have been violated or not, reference to some facts in detail becomes necessary. The show cause notice dated 29th October, 1981 merely stated that the current tenure of the Government directors appointed under section 408 of the Companies Act had to expire on 1st January, 1982 and the petitioner should indicate as to why the Government directors should not be appointed for a period beyond 1-1-1982 under the said provision of law. Strongly relying upon the Supreme Court judgement in the case of S.L Kapoor v. Jagmohan and others, AIR 1981 S.C 136 (2), the contention of the learned counsel for the petitioner is that if was imperative for the respondents to indicate in the show cause notice the reason as to why the proposed action was contemplated. According to the learned counsel, neither in the show cause notice nor thereafter were any reasons for the proposed action ever communicated to the petitioner or its counsel.

42. In S.L Kapoor's case (supra), the Lt. Governor Delhi, in exercise of his powers conferred by section 238 (1) of the Punjab Municipal Act, had superseded the New Delhi Municipal Committee. An Administrator had been appointed to exercise and perform all the powers and duties of the Committee till the same was re-constituted. One of the contentions raised by the petitioner therein was that no notice to show cause against the supersession had been issued to the Committee and it did not have any hint that it was going to be superseded. In other words, the submission was that the principles of natural justice had been violated. The High Court had held that the Committee was aware of the allegations and had been given an opportunity to state its case and, as such, there had been no failure regarding the observance of the principles of natural justice. On appeal, the Supreme Court, however, held that the New Delhi Municipal Committee had never been put on notice of any proposed action of supersession being taken and that no opportunity had been given to it to explain any facts or circumstances on the basis of which that action was proposed. With regard to the question as to when the requirements of natural justice would be met, the observations of the Supreme Court were as follows: —

“In our view, the requirements of natural justice are met only if opportunity to represent is given in view of proposed action. The demands of natural justice are not met even if the very person proceeded against has furnished the information on which the action is based, if it is furnished in a casual way or for some other purpose. We do not suggest that the opportunity need be a ‘double opportunity’ that is, one opportunity on the factual allegations and another on the proposed penalty. Both may be rolled into one. But the person proceeded against must know that he is being required to meet the allegations which might lead to a certain action being taken against him. If that is made known the requirements are met.”

Yet another observation made by the Supreme Court in this context at page 142 is as follows: —

“And, natural justice may always be tailored to the situation. Minimal natural justice, the barest notice and the ‘littlest’ opportunity, in the shortest time may serve. The authority acting under section 238 (1) is the master of its own procedure. There need be no oral hearing. It is not necessary to put every detail of the case to the Committee; broad grounds sufficient to indicate the substance of the allegations may be given.”

43. From the aforesaid observations of the Supreme Court it would follow that there is no requirement of law that in the show cause notice itself the grounds on which the action is proposed to be taken must be stated. Even after the issuance of the show cause notice, but prior to the decision being taken, the Government can inform the party as to why action is proposed to be taken and give that party an opportunity to represent its case. It is, therefore, to be seen whether in the present case, before the impugned decision was arrived at by the Central Government, was any such opportunity given to the petitioner. In other words, was the petitioner informed about the grounds on the basis of which the Government intended to appoint Government Directors.

44. In our opinion, however, the facts on record cannot persuade us to come to the conclusion that principles of natural justice have in any way been violated. While it is true that in the show cause notice dated 29th October, 1981 the reasons as to why the Government proposed to pass an order were not indicated, but according to the averments in the petition itself, on 10th December, 1981 when the case was being heard by the Company Law Board the petitioner's counsel demanded the reasons and grounds on the basis of which the show cause notice was issued. It is alleged that the Chairman had assured that the grounds and all communications received by the Company Law Board would be furnished to the petitioner. As directed by the Chairman, the papers received by the Company Law Board, on the basis of which action was proposed to be taken, were communicated to the petitioner. The list of the documents, which were so handed over to the petitioner's counsel has been placed on record. The petitioner's grievance is that though these documents were given to it but there was no document which contained the reasons on the basis of which the proposed action was sought to be taken.

45. In the impugned order, reference is made to the hearing which had taken place on 10th December, 1981. After taking note of the contention of the counsel for the petitioner that the show cause notice had not specified the grounds on which the action was proposed to be taken, in the impugned order it is observed (obviously) with reference to what transpired at the hearing on 10th December, 1981 as follows:

“The Chairman, Company Law Board clarified on behalf of the Board that no further notice other than the show cause notice would be issued and the parties would have to proceed on the basis of the grounds which had already been made out for the appointment of Government Directors under section 408 (1) of the Act.”

The Company Law Board also directed that copies of the representations received from the Company Government Directors, insurance companies, banks and workers and employees unions be given to the Counsel, Shri V. Mehta for Shakti Trading Company Private Limited and Shri G.K Morarka and directed that any further representation in this regard be, filed by the parties on or before the 21st December, 1981 and adjourned the hearing to the 24th December, 1981.”

46. It was pursuant to the aforesaid direction that the copies of various documents were given. Of course, the petitioner wrote to the Company Law Board on December 14, 1981 that grounds on the basis of which the show cause notice had been issued had not been supplied. In our opinion, however. We see no reason to disbelieve the aforesaid observations of the Central Government wherein it is stated that at the time of hearing on 10th December, 1981 the Chairman of the Board had clarified that “the parties would have to proceed on the basis of the grounds which had already been made out for the appointment of Government Directors under section 408 (1) of the Act”. This obviously means that the grounds would be the same which were contained in the earlier show cause notices and orders which had been passed by the Company Law Board. Amongst the documents, which were given to the petitioner on 14th December, 1981 by the Company Law Board, were the reply dated 10-11-1981 of the Company to the show cause notice as well as the representation of the staff members of the Company dated 7-11-81. The counsel for the respondents has brought to our notice, by the written submissions dated 19th April, 1983, the synopsis of the reply of the Company to the show cause notice. The perusal thereof shows that the Company had specifically contended that the Government Directors should be appointed in view of the pendency of the suit in Bombay and the seriousness of the allegations contained therein. Reference was also made by the Company to the report of Bansi Mehta and it was submitted that the same reasons which prevailed with the Company Law Board in 1979 should prevail and that order should be passed appointing Government Directors with effect from 1st January, 1982. The perusal of the said reply of the petitioner, which was furnished to the petitioner by the Company Law Board, therefore, clearly indicated to petitioner of the grounds on which the order was proposed to be passed. The fact that petitioners were aware of the grounds on which the order was proposed to be passed is also evident from the perusal of the reply of the petitioner dated 21st December, 1981 filed to the impugned show cause notice. Though in the said reply it has been contended by the petitioner that the Company Law Board has not furnished the grounds on the basis of which the said notice has been issued but, nevertheless it gave its answers to the representation of the employees and to the allegation with regard to mismanagement by Shri Morarka and the suit filed by the Company in the Bombay High Court. It was contended by petitioner in the said reply that the suit filed against the majority shareholders was a false and frivolous suit and the pendency of the same could not be used as a ground for appointing Government Directors under section 408. The detailed reply, which was so filed by petitioner, leaves no manner of doubt in our mind that the petitioner was aware of the grounds on the basis of which the show cause notice was issued and that at the first hearing of the case on 10th December, 1981 the Chairman of the Company Law Board must have indicated that the grounds for issuing the show cause notice were the same as before.

47. If, therefore, as we have held, the petitioners were informed about the grounds at the time of the hearing of the case on 10th December, 1981 and thereafter the hearing was postponed and documents on which the reliance was sought to be placed given to the petitioner who filed its reply to the show cause notice and another hearing given, it cannot be said that the principles of natural justice have been violated. The principles of natural justice enunciated by the Supreme Court in S.L Kapoor's case (supra) have been complied with in the present case. The petitioners were aware of the grounds on the basis of which it was proposed that an order under section 408 would be passed by the Government and sufficient opportunity was given to make their submissions.

48. It was next contended that the principles of natural justice also required that an opportunity should have been given to the share-holders to object to the name of any person who was proposed to be appointed as a director. We see no force in this contention. It is for the Central Government to decide as to how many directors are to be appointed. It is also for the Government to decide as to who should be appointed. As we read section 408, the only opportunity which has to be granted to a party is to show cause whether any director should be appointed or not. The section does not postulate hearing a party as to whether it objects to any particular person being appointed as a director or not. Once a valid decision has been taken to appoint a certain number of directors, thereafter it is for the Government to consider who is the best person to be so appointed. This is a matter of discretion which has to be exercised by the Government, and there can be no question of applying the principles of natural justice at this stage when once a Party has been heard on the question as to whether Government Directors should or should not be appointed. We would, however, like to add that if a person is appointed as a director whose interest is in conflict with that of the Company and whose appointment is not in the interest of the Company or in public interest then, possibly, such appointment can be challenged as being ultra vires of section 408 of the Act. That, however, does not mean that before the appointment of such a person his name has to be communicated to the majority share-holders for their comments or objections.

49. It was lastly submitted that the reasons for the reappointment of the directors have been recorded by the Secretary of the Company Law Board and not by the Board itself. We are not in a position to accept this contention. The bald assertion of the petitioner is denied by the respondents. The perusal of the reasons show that the same have been recorded by the Board. No fact or circumstances has been brought to our notice which could persuade us to hold otherwise.

50. For the aforesaid reasons the writ petition is dismissed.

Writ petition dismissed.