Baldevdas R. Raheja V/s Union Of India

Principles of Natural Justice must be followed not only in quasi-judicial orders but also even in administrative orders if it gave rise to civil consequences.

Case name:Baldevdas R. Raheja V/s Union Of India
Case number:O.C.J. Miscellaneous Petition number-683 of 1973
Court:The High Court Of Bombay
Decided on:MARCH 20, 1974
Relevant Act/Sections:Sections 10E, 256, 397, 398, 408, 637 and 642 of Companies Act, 1956, Rules 3 and 3A to 3F of Company Law Board (Procedure) Rules, 1964, Article 14 of constitution, 1950
  • This is a petition by certain shareholders of the National Rayon Corporation Limited (respondent no. 7 or NR Co. Ltd.) for a writ of mandamus for withdrawing or cancelling the order dated June 25, 1973 made by the Company Law Board (respondent No. 2) appointing respondents nos. 5 and 6 as Government Directors for one year from June 30, 1973 on the Board of Directors of NR Co. Ltd. and for declaring the same to be void and inoperative. A writ of certiorari has also been filed for quashing the said impugned order and also for a declaration that certain directors mentioned had been duly elected at the annual general meeting (AGM) of NR Co. Ltd. held on May 11, 1973 and that they were entitled to act as Directors of NR Co. Ltd.
  • The National Rayon Corporation Ltd. consists of ordinary shares and Preference shares. Both the categories of shares carry equal voting rights. The company is engaged in the manufacture of Rayon Yarn and other allied products. In April 1956, L.C. Kapadia and N.C. Kapadia, who were the nominees of Kapadia Brothers, obtained substantial shareholding in the said company. On April 8, 1969 L.C. Kapadia wrote a letter to Rasiklal Chinai stating that he would like to assure  that none of them had any intention whatsoever of interfering with the management of the company.
  • In the meantime the Kapadias had increased their shareholding by purchasing shares in the open market. The position of the Chinais and the Kapadias in 1969 was that the Chinais had management and control of the company with a very small shareholdings, while the Kapadias had large shareholdings with no actual control of the company, with the result that there was a struggle for control between the two.  In order to forestall any attempt on the part of Kapadias to get the control of the management of the company the Board of Directors, dominated by the Chinais, attempted to move a resolution at the AGM  held in June 1969 for appointment of Jivanlal C. Chinai and his son, Rasiklal J. Chinai, as Managing Directors for a period of five years. The said resolution was opposed by the Kapadias and was therefore not moved.
  • The Articles of Association of the co. did not provide for the appointment of Managing or whole-time Directors, the President and Vice-Presidents were constituted one-man Committees with substantial powers of management delegated to them. The said scheme was opposed by the Kapadias. It seems that in that regard a suit was filed by them in this Court and an interim order was passed therein restraining the President and Vice-Presidents from exercising any managerial functions. a petition was filed under S.  250 of the Companies Act, 1956, to freeze the voting rights of the shares held by the Kapadia group and 3 different complaints under S. 409 of the Companies Act, 1956.
  • The application under S.409, the Company Law Board directed that any resolution passed or that might be passed or any action taken or that might be taken to effect a change in the Board of Directors after the date of the complaint shall have no effect, unless confirmed by the Company Law Board. While passing the said order in respect of the said petitions, the Company Law Board suo motu initiated proceedings under S.408 of the Companies Act. After giving hearing to the concerned parties, the board appointed two government directors T.A. Pai, and K.C. Raman for a period of two years in the interest of the company. On the said T.A. Pai being appointed a Minister in the Central Cabinet.
  • The Company Law Board found that with regard to the shares standing in the names of Kapadias the group was indulging in unhealthy practices with a avowed object of controlling the voting power and that the means employed by them in respect of the said shares were of a speculative nature and  also held that the Chinai group management was not satisfactory.
  • On March 23, 1972 shareholders of the respondent No. 7 company made an application to the Company Law Board for continuing the said two Government Directors on the Board of Directors of the respondent No. 7 company. After the said application was received by company law board it made enquires as regards the several allegations against kapadias made in application and after obtaining on their report on 18th May 1973 issued a show cause notice. It was alleged that the performance of the Kohinoor Mills, where the Kapadias were in management and control, had been dismal as shown by the detailed report of the auditors for the year ended March 1971 which provided unimpeachable evidence that their management did not have any interest in the company.
  • It seems that at the time of the  decision of the Supreme Court although the said amendment of s. 10E as well as the amended rule 3, had come into effect, no specific order thereunder was passed authorising the Chairman or any of the officers of the Board to exercise the functions of the Government and the Supreme Court had to deal with rule 3 as it existed before the amendment. After the said Rules were framed, in pursuance of the provisions of sub-s. (4A) of s. 10E, with the previous approval of the Central Government, an order was made on July 13, 1972 providing for the specific allocation of work of the Company Law Board.
  • Whether in spite of the said order passed under S. 10E(4A) , the said rule 3B for the quorum at the board meeting would have application in the cases where the function and powers under S. 408 of the Companies Act are required to be discharged or exercised by the board ?
  • Whether in this case not giving the notice of the meetings to the Chairman, could be excused so as to validate the proceedings of the meeting of the Board held by only two of the members?
  • The court held that Rule 3B of the Rules providing that two members present at the meeting shall constitute a quorum of the Board meeting, would be equally applicable to the meetings of the Company Law Board held to exercise powers and discharge functions under Section 408 of the Companies Act and that the decision taken at such a meeting having a proper quorum would still be the decision of the Board. On the reading of the provisions of Section 10E of the Companies Act along with the Rules, the rule of quorum at the Company Law Board meeting as contained in Rule 3B would apply to meetings of the Board inspite of the said order being passed under Section 10E(4A).
  • The court observed that Shah had at the initial stage before any meeting of the Company Law Board had been held, intimated to the Board as well as to the Minister of Law and Justice under whom the said Board functions that he would not be able to participate in the proceedings and not to send the papers in respect thereof to him on a legitimate ground that his father was once employed by one of the concerns of the Kapadias.
  • Further  held that under the circumstances it was not necessary to give notice of the meeting to the Chairman Shah, as summoning him could have no possible result. The Company Law Board (Procedure) Rules should be construed liberally. Under Section 10E(4) by reason of any defect in the constitution of or vacancy in the Board, no act of the Board shall be called in question. Held, that under the circumstances the proceedings of the Board or the impugned order could not be in- validated on the ground that no notice of the meetings of the Board was given to the Chairman or that the meetings of the Board were conducted and the order was passed by only two of its members who were sufficient to form a quorum at the Board’s meeting under the said Rules.
  • The Apex Court further held that Principles of natural justice are required to be observed not only in quasi judicial orders, but also even in administrative orders. Even if the order were administrative one, if it gave rise to civil consequences in passing the same the authority is required to observe the principles of natural justice. Even if in this case the order made by the Company Law Board under S. 408 of the Companies Act were held to be an administrative order it cannot be disputed that the same gave rise to civil consequences and therefore in making the said order the Company Law Board was required to observe principles of natural justice.
  • The court pointed out that the powers of the Government under Section 408 of the Companies Act are of an urgent and emergent nature enabling the Government, under certain circumstances, to step into the company’s administration to prevent oppression of members or in the interests of the shareholders, the company and the public. Therefore, looking to the said object for which Section 408 was enacted, it cannot be expected and desired that before passing any order under the said section, the Government is required to conduct any detailed and time-consuming enquiry in the matter by giving notice to every shareholder of the company having a large number of shareholders, as in this case, and to hear each of them if he so desired.
  • Further observed that the scope and object of the said section does not contemplate and cannot permit of any such detailed enquiry and to hold otherwise would be frustrating the whole object of the section. Further, the use of the expression “as it deems fit” in connection with the enquiry to be made by the Government under Section 408 as well limits the scope of the enquiry. The use of the expression “such enquiry as it may deem fit to make” left the nature and the ambit of the enquiry to the discretion of the authority concerned. Further, the powers exercised by the Government by an order under Section 408 are not intended to interfere with or to displace the existing management of the company, but are only intended to maintain a control over the same.
  • According to the views of the court the said powers are in their very nature restricted as to the number of directors to be appointed and the duration of the order. The exercise of the powers under Section 408 by the Government, therefore, does directly touch the rights and interests of each individual shareholder. Under the circumstances, it appears that while passing the order under Section 408 it is not obligatory on Government to send to every shareholder either a show cause notice or a notice of hearing if he so desired. In the present case the existence of both the circumstances, namely, the object of Section 408 requiring prompt action and the large body of shareholders who might be affected, would make the giving of notice and opportunity of being heard impracticable.
  • It was observed that the power of management of the company is vested in the Board of Directors as a result of the Companies Act as well as the Articles of Association of the company unless and until the general body by the policy of its Articles chooses to take them away, and substitute others more to its taste, the Board of Directors in its right continues to manage the affairs of the company.
  • Therefore, the decisions of the Board of Directors are to be taken by a majority. In this case, therefore, in the absence of any definite action to the contrary being taken by the general body of the company at a general meeting, the Company Law Board was entitled to accept the majority view of the Board of Directors in favour of the appointment of Government Directors as expressed in their letter of May 28, 1973 as the views of the company and to act upon the same. Merely because two Government directors had expressed their view along with four other directors of the company in favour of appointment of Government directors, would not necessitate the Company Law Board to give an opportunity of being heard to every shareholder.
  • The  non-disclosure of documents and reports (allegedly against a party) amounting to non-compliance with the principles of natural justice would have to be dealt with on the facts and circumstances of each case and all that the Court had to find out was whether such a non-disclosure had in any way acted to the prejudice of the party or whether the disclosure was necessary on the ground of fair play or just decision of the matter.
  • The court observed that there was sufficient material before the Company Law Board for its conclusion, on nine out of ten specific circumstances relied on, that if the control of the management were to go into the hands of the Kapadia group of directors then the interest of the company as well of the public at large would be prejudicially affected. It could not be said that these instances showing mismanagement on the part of the Kapadias were irrelevant for considering the main question before the Company Law Board, namely, whether the management by the Kapadias of the company would be prejudicial to the company, the shareholders and the public. The conclusions of the Company Law Board that if the Kapadias were allowed to control the company by reasons of their Preference shares the interests of the company would suffer also could not be attacked on the ground that it was irrelevant.
  • The court noted that the only circumstance without any material that appeared to have been taken into consideration by the Company Law Board that if the Kapadias were allowed to come into the control of the company they were likely to mismanage the same, was that there was a slump in prices of the company’s shares due to publicity given by the Kapadias to the election of seven directors (at the company’s meeting held on May 11, 1973). An order based on several grounds, some of which are found to be nonexistent or irrelevant, can be sustained if the Court is satisfied that the authority would have passed the order on the basis of other relevant and existing grounds, and the exclusion of the irrelevant and non-existing grounds could not have affected the ultimate opinion or decision.
  • The Court held that  in spite of the said solitary circumstance, the Company Law Board could have passed the impugned order on the basis of other relevant and existing grounds and the exclusion of the said solitary circumstance would not affect the ultimate opinion of the Company Law Board.
  • Thus,  S. 397-398 of the Companies Act, as compared with Section 408 of the Act would show that the purpose of the two groups of sections as well as the ambit of the powers thereunder to be exercised by the Court on the one hand and by the Government on the other are quite distinct, and therefore, there cannot be any question of Section 408(1) being violative of Article 14 of the Constitution and therefore invalid.
  • In this case the judgement was given by JUSTICE D.M REGE that the result, therefore, is that the petition is dismissed. The Rule stands discharged. The petitioners to pay the respondents’ costs in separate sets.
  • Costs to be taxed on long cause basis with two counsel certified as the hearing had taken place for about sixty-six and a half hours before me. Discretion is given to the Taxing Master to allow the instruction costs exceeding Rs. 1,000. The interim order dated October 8, 1973 to continue for a period of two weeks from today.

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