Court Judgments

PETITIONER:
ROHTAS    INDUSTRIES LTD.

Vs.

RESPONDENT:
S.D. AGARWAL & ANR.

DATE OF JUDGMENT:
16/12/1968

BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
SIKRI, S.M.
BACHAWAT, R.S.

CITATION:
1969 AIR  707          1969 SCR  (3) 108
1969 SCC  (1) 325
CITATOR INFO :
D        1970 SC 564     (26,228,229,231)
R        1970 SC1789     (14)
RF        1972 SC1816     (18)
RF        1974 SC2249     (10)
D        1976 SC1913     (18)
R        1978 SC 597     (86,222)
D        1982 SC 149     (1245)
C        1984 SC1271     (26)
RF        1987 SC1109     (26)

ACT:
Indian    Companies Act (1 of 1956), s. 237 (b)(i)  and  (ii)-
Circumstances  suggesting  fraud-Existence  of-If  condition
precedent to action under section.

HEADNOTE:
On May 20, 1960, Albion Plywoods Ltd. resolved at a  general
meeting     to  convert  its preference  shares  into  ordinary
shares.      M/s.    Sahu Jains were its managing  agents.    Some
time before, in April 1960, New Central Jute Mills Co.    Ltd.
had  sold the preference shares of Albion Plywoods which  it
was  holding.  One S. P. Jain, against whom  proceedings  in
criminal  courts  were pending for acts of  misfeasance     and
malfeasance in relation to other companies, was     controlling
both  the New Central Jute Mills Co. and Sahu  Jains.    With
respect to this sale there was a complaint to the Department
of Company Affairs, Government of India, that the management
of  New Central Jute Mills knew that the  preference  shares
would be converted into ordinary shares and so the sale     was
effected  at  an  undervalue so     that,    on  conversion    into
ordinary.  shares they would fetch a higher price, and    that
the transaction was effected for the benefit of the managing
agents,     their    friends and brokers, at the expense  of     the
shareholders.    In  the course of  investigation  into    this
charge,     it  was discovered that the  appellant-company     had
also  ‘sold 3000 preference shares of Albion Plywoods  which
it  was holding, on May 6, 1960.  The appellant-company     was
also  controlled  by  S. P. Jain.  On  April  11,  1963     the
Central     Government passed an order under s. 237(b) (i)     and
(ii) of the Companies Act, 1956, appointing an inspector  to
investigate into the affairs of the appellant-company and to
report thereon to the Central Government, on the basis    that
the  sale of preference shares was a fraudulent     transaction
considered  in    the background of the association of  S.  P.
Jain  with the appellant-company and other  companies.     The
appellant,company  filed  a writ  petition  challenging     the
order.     The High Court dismissed it on the ground that     the
opinion     of the Central Government was not open to  judicial
review    and that the declaration of the Government  that  it
formed the required opinion was conclusive.
In  appeal  to this Court, it was contended that  under     the
section,  an  inspector     may be appointed only    if,  in     the
opinion of the Government there are circumstances suggesting
that  the business of the company was being  conducted    with
intent    to defraud its creditors. members or other  persons,
or  for     a fraudulent or unlawful purpose, or  in  a  manner
oppressive  of any of its members, or that the    company     was
formed for a fraudulent or unlawful purpose, or that persons
concerned   in    its  formation    ,or  management      have,      in
connection  therewith, been guilty of fraud, misfeasance  or
other  misconduct towards the company or its  members;    that
is, though the opinion of the Government is subjective,     the
existence  of the circumstances is a condition precedent  to
the  formation of the opinion and therefore, the  Court     was
not  precluded    from  going  behind  the  recitals  of     the
existence  of  such circumstances in the  order,  but  could
determine, whether the circumstances did in fact exist,     and
whether the Central Government took extraneous matters    into
consideration.
HELD  (per Sikri and Hegde, JJ.) : Sections 235 to  237     are
allied sections and form a scheme for investigation into the
affairs of a company.
109
The  investigation  under  s. 237(b) is of  a  fact  finding
nature    which does not bind anybody.  The Government is     not
required to act on it and the company has to be called    upon
to have its say in the matter.    But, s. 237 takes its colour
from  the  other two sections and those sections  show    that
such  an investigation is a very serious matter     and  should
not  be ordered except on good grounds.     The appointment  of
an  inspector is likely to receive publicity as a result  of
which  the  company’s reputation and prospects    may  suffer.
The power to appoint an inspector is an inroad on the rights
of  the company to carry on its business and  would  violate
the  fundamental  right     of  its  shareholders    under    Art.
19(1)(f),  unless  the power is so interpreted as  to  be  a
reasonable  restriction in the interest of  general  public,
and  not  as an arbitrary power.  It would be  a  reasonable
restriction  if circumstances suggesting that the  company’s
business  was being conducted as laid down in s. 237(b)     (i)
or that the persons mentioned in s. 237(b) (ii) were  guilty
of  -fraud  or misfeasance or other misconduct    towards     the
company     or its members, exist as a condition precedent     for
the  Government two form the required opinion, and,  if     the
existence of those circumstances is challenged, the Court is
entitled to examine whether those circumstances existed when
the order was made.  Further, the Department of the  Central
Government  which deals with companies is a body, expert  in
company     law matters, and the standard prescribed  under  s.
237(b)    is not the standard required of an ordinary  citizen
but that of an expert who would take into consideration only
relevant material. [ 1 17 F; 11 8 G-H; 1 19 B, E; 128 H; 129
A-E]
Observations  of  Hidayatullah    and Shelat,  JJ.  in  Barium
Chemicals  v. Company Law Board, [1966] Supp.    S.C.R.    311,
followed.
Padfield v. Minister of Agriculture, [1968] 1 All E.R.    694,
Commissioner  of  Customs & Excise v. Cure and    Deeley    Ltd.
[1962] 1 Q. B. 340, Roncarelli v. Duplessis,. [1959]  S.C.R.
(Canada)  121  and  Read v. Smith, [1959]  New    Zealand     Law
Reports, 996, applied.
Susannah  Sharp     v.  Wakefield, [1891]    A.C.  173,  179     and
Nakkuda     Ali v. M. F. De S. Jayaratne, [1951] A.C.  66,     77,
referred to.
State  of Madras v. C. P. Sarathy & Anr. [1953] S.C.R.    334,
Joseph Kuruvilla Vellukunnel v. The Reserve Bank of India  &
Ors. [1962] 3 supp.  S.C.R. 632, Hubli Electricity Co. Ltd.-
v. Province of Bombay, L.R. Vol.  LXXVI I.A. 1948-49 p.     57,
Robinson v. Minister of Town and Country Planning, [1947]  1
K.B. p. 702 and Point of Avr Collieries Ltd. v.Lloyd George,
[1943] 2 All E.R. p. 546, not applicable.
In the present case, the only material on the basis of which
the  impugned order was made was the transaction of sale  of
preference shares of Albion Plywoods.  But at the time    when
the  Government made the impugned order it did not know     the
market    quotations for the shares, and in fact,     the  market
price  showed that no fraud was involved in the sale of     the
shares.      No  Reasonable person, much less an  expert  body,
could  have  come  to  the conclusion  that  any  fraud     was
involved.  if  the Government had any  suspicion  about     the
transaction  it should have probed further into     the  matter
since  the  order  could not be justified  on  the  material
before    it.  The fact that one of the leading  directors  of
the  appellant-company    was  a suspect in  the    eye  of     the
Government  because  of his antecedents was not     a  relevant
circumstance  and  should not have been     taken    into  consi-
deration  by  the Government which was    entrusted  with     the
responsibility    of forming a bona fide opinion on the  basis
of relevant material. [129 F-H; 130 A-D]
(Per  Bachawat, J.) : The object of investigation  under  s.
237(b)    is  to find out whether in fact any fraud  has    been
committed.  The section con-
110
fers  an  administrative  and  not  a  judicial     power.      is
discertionary  and no appeal is provided against  an  order.
Such discretionary power must be exercised honestly and     not
capriciously  or arbitrarily or for Ulterior purposes.     The
section must be interpreted in the light of its own language
and subject matter and not by reference to other sections or
other statutes.     So interpreted, the condition precedent for
making    the  order under the section is the opinion  of     the
Central     Government that there are circumstances  suggesting
fraud  and  not the existence of the circumstances.  If     the
opinion     of  an     administrative     agency     is  the   condition
precedent  to the exercise of the power the relevant  matter
is  the opinion of the agency and not the grounds  on  which
the opinion is founded.     The authority must form the opinion
honestly  and  after  applying    its  mind  to  the  relevant
materials  before it.  If it is established that there    were
no materials at all upon which the authority could form     the
requisite  opinion, the Court may infer that  the  authority
passed    the  order without applying its mind, that  is,     the
requisite  opinion  is lacking and therefore  the  condition
precedent to the exercise of the power under the section  is
not  fulfilled.      The  opinion is displaced  as     a  relevant
opinion if it could not be formed by any sensible person  on
the  material before him, the reason being, that  the  Court
may  then infer that the authority either did  not  honestly
form the opinion or that in forming it, it did not apply its
mind.  Within these narrow limits the opinion of the Central
Government  is    not conclusive and can be  challenged  in  a
Court, but the Court has no power to review the facts as  an
appellate body nor can it substitute its opinion for that of
the  Government.  Had the opinion been conclusive  it  would
have been open to challenge as violative of Arts. 14 and  19
of the Constitution. [131 E-H; 132 A-F; 133 E]
Corporation of Calcutta v. Calcutta Tramways Co. Ltd. [1964]
5 S.C.R. 25, Joseph Kuruville Vellukunnel v. Reserve Bank of
India,    [1962] Supp. 3 S.C.R. 632, Hubli Electricity Co.  v.
Province  of  Bombay,  L.R.  76     I.A.  57,  Ross-Clunis      v.
Papadopoullos  &  Ors.,     [1958]     2 All    E.R.  23,  State  of
Maharashtra  v. B. K. Takkamore, [1967] 2 S.C.R.  583,    585,
588, Province of Bombay v. K. S. Advani, [1950] S.C.R.    621,
Nakkuda.  Ali v. M. E. De, S. Jayaratne, [1951] A.C. 66, 77,
State  of  Madras v. C. P. Sarathy and Anr.,  [1953]  S.C.R.
334, Swadeshi Cotton Mills Co. Ltd. v. State of U.P. & Ors.,
[1962] 1 S.C.R. 422 and State of Bombay v. K. P.  Krishnan,&
Ors. [1961]1S.C.R 227, referred.
The learned Judge’s own observations in Barium Chemicals  v.
Company Law Board, [1966] Supp.     S.C.R. 311, 343, explained.
In  the     present  case,     no complaint  with  regard  to     the
impropriety  of     the  sale of preference  shares  of  Albion
Plywoods  was made to the Central Government.  There was  no
material  suggesting that the purchasers were benamidars  of
M/s.  Sahu Jains or their friends.  The market price of     the
,shares of Albion Plywoods on or about the date of sale     was
not known to the Central Government when the order was    made
and does not show that the transaction was fraudulent.     The
charge that the sale was fraudulent was not communicated  to
the  appellant-company    nor were they asked  to     give  their
explanation on the subject.  The Government did not seem  to
rely  on  the transaction of sale of  preference  shares  as
suggesting  fraud.  Therefore, there was no material  before
the Government on which it could form the opinion that there
were  circumstances suggesting fraud, and hence the  opinion
was formed without applying its mind to the materials before
it and was in excess of its powers under s. 237(b). [135  E,
G; 136 H; 137 A-B, D]

JUDGMENT:
CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  2274  to
2276 of 1966.
111
Appeals     by  special leave from the  judgments    and  orders,
dated January 20, July 4, and July 5, 1966 of the Patna High
Court  in C.W.J.C., Nos. 18 of 1966, 910 of 1965 and 397  of
1966 respectively.
M.   C.     Setalvad, M. C. Chagla, R. K. Garg, S.     C.  Agarwal
and S.      Chakravarti,     for  the  appellant  (in  all     the
appeals).
Niren De, Attorney-General, V. C. Mahajan and S. P. Nayar,
for the respondents (in all the appeals).
The  Judgment  of  S.  M. SIKRI and K.    S.  HEGDE,  JJ.     was
delivered  by  HEGDE,  J. R. S.     BACHAWAT,  J.    delivered  a
separate Opinion.
Hegde J. The only question that arises for decision in these
appeals     by special leave, is whether the order made by     the
Central Government in No. 2(4)-CL.1/63, Government of India,
Ministry of Commerce and Industry, Department of Company Law
Administration on April 11, 1963 is liable to be struck down
as not having been made in accordance with law.
The  appellant    in these appeals is a  company    incorporated
under  the Indian Companies Act, 1913 having its  registered
office    at Dalmia Nagar, Shahbad District, Bihar State.      It
is  manufacturing paper, cement, sugar, vanaspati and  other
articles.   Its authorised capital is rupees 15     crores     and
the  paid  up capital little more than six crores.   It     was
incorporated in the year 1933.
The impugned order reads
“No. 2(4)-CL.1/63
Government of India,
Ministry of Commerce and Industry,
Department of Company Law Administration.
ORDER
Whereas  the  Central  Government     is  of     the
opinion     that    there    are    circumstances
suggesting   that     the  business     of   Rohtas
Industries   Limited  a  company    having     its
registered   office  at    Dalmianagar,   Bihar
(hereinafter referred to as the said  company)
is being conducted with intent to defraud     its
creditors,  members or other persons  and     the
persons  concerned  in the management  of     its
affairs  have  in     connection  therewith    been
guilty of fraud, misfeasance, other misconduct
towards the said company or its members,
AND WHEREAS the Central Government consider it
desirable      that     an  Inspector     should      be
appointed     to investigate the affairs  of     the
said Company and to report thereon.
112
NOW,  THEREFORE,    in exercise of    the  several
powers  conferred by sub-clauses (i) and    (ii)
of clause (b) of Section 237 of the  Companies
Act,   1956  (Act     1  of    1956)  the   Central
Government  hereby  appoint  Shri     S.  Prakash
Chopra   of  Messrs.   S.     P.  Chopra  &     Co.
Chartered     Accountants, 31,  Connaught  Place,
New  Delhi  as Inspector    to  investigate     the
affairs  of  the said company for     the  period
1-4-1958    to date and should the Inspector  so
consider    it  necessary -also for     the  period
prior to 1-4-1958 and to report thereon to the
Central  Government  pointing out     inter    alia
irregularities and contravention in respect of
the  provisions of the Companies Act, 1956  or
of  the Indian Companies Act, 1913 or  of     any
other  law  for the time being  in  force     and
person or persons who are responsible for such
irregularities and contravention.
(2)   The      Inspector   shall   complete     the
investigation  and  submit six copies  of     his
report  to  the Central Government  not  later
than  four  months from the date of  issue  of
this  order  unless  time in  that  behalf  is
extended by the Central Government.
3.    A separate order will issue with  regard
to  the  remuneration  and  other      incidental
expenses of the Inspector.
The Eleventh day of April, 1963.
By order and in the name of the
President of India
Sd/-   D.S.  Dang     Deputy     Secretary  to     the
Government of India”
The  time granted to the Inspector has been  repeatedly     ex-
tended.      For  one  reason or the  other  the  investigation
directed  is  still  in     its  initial  stage.    The  various
extensions  given for completing the investigation are    also
challenged in some of the appeals.  But that contention     was
not  debated  before  us.   Hence it  is  not  necessary  to
consider that question.
The contention of the appellant is that the Central  Govern-
ment had no material before it from which it could have come
to the conclusion that the business of the appellant company
is  being  conducted with intent to defraud  its  creditors,
members     or  other persons or the persons concerned  in     the
management of its affairs have in connection therewith    been
guilty of fraud, misfeasance or other misconduct towards the
said company or its members.
113
In response to the rule issued by the Patna High Court    Shri
Rabindra Chandra Dutt, the then Secretary to the  Government
of India, Ministry of Finance, Department of Company Affairs
and  Insurance    and Chairman, Company Law Board,  New  Delhi
filed    an  affidavit  in  opposition  on  behalf   of     the
respondents.    Therein     various  objections  to  the    writ
petition were taken but the pleas raised by him in paragraph
5(a)  and (b) of his affidavit are the only  pleas  relevant
for our present purpose.  This is what is stated therein :
“I say that the true facts are -as under-
(a)   Shri  S.  P.  Jain    together  with     his
friends,      relations   and   associates      is
principally in charge of the management of the
petitioner  company.   Over  a  long   period,
several  complaints had been received  by     the
Deptt.  as to the misconduct of the said    Shri
S. P. Jain towards companies under his control
and  management.    Some of these were  referred
to  and  inquired     into  by  a  commission  of
Inquiry  headed by Mr. Justice Vivian Bose  of
the  Supreme  Court  of India,  which  in     its
report,  dated 15-6-62 made  adverse  findings
and  observations     against Shri  S.  P.  Jain.
Shri  Jain  is being prosecuted in  the  Court
District Magistrate, Delhi under sections 120B
read  with sections 409, 465, 467 and  477  of
the  Indian  Penal  Code    in  regard  to     his
misconduct in the management of what are known
as  the  Dalmia Jain group of  companies,     and
most  of the material upon the basis of  which
this prosecution was launched was available to
the Central Government on 11-4-63.  Shri    Jain
is  also    being  prosecuted  in  Calcutta     for
misconduct  in the management of Messrs.     New
Central Jute Mills Co., Ltd., a company  under
the     same management as the petitioner
, on  the
basis  of an F.I.R. lodged by  the  Department
with  the Special Judge, Police  Establishment
just  before the 1 1 th April 1963, Shri    Jain
is  also    being proceeded against     before     the
Companies Tribunal under sections 388B and 398
for misconduct in managing the affairs of M/s.
Bennett Coleman & Co., Ltd. and details as  to
Shri  Jain’s misconduct were with the  Central
Government as on 11th April, 1963.
(b)   Complaints had also been received by the
Department    before    11th    April,    1963
specifically as to the misconduct on the    part
of the manage-
114
ment of the petitioner company in the  conduct
of its affairs.”
The High Court dismissed the writ petition holding that     the
,opinion formed by the Central Government under s. 237(b) of
the  Companies’     Act 1956 (hereinafter to be called  as     the
Act)  is  not open to judicial review;    the  impugned  order
declares that the Central Government had formed the required
opinion and the same is conclusive.  That conclusion of     the
High Court is ,challenged in this Court.
When this appeal came up for hearing on 17-9-1968 this Court
directed the respondents to file a further affidavit placing
,on record the complaints mentioned in paragraph 5(b) of the
aforementioned affidavit of Shri Robindra Chandra Dutt.     The
said  affidavit was directed to be filed within a  fortnight
from  that date and the appellants were permitted to file  a
reply affidavit within a week thereafter.
In  pursuance  of  the above order Shri     Sisir    Kumar  Datta
Secretary to the Government of India, Ministry of Industrial
Development  and  Company Affairs.   Department     of  Company
Affairs     New Delhi filed his affidavit on October  4,  1968.
Along  with  that  affidavit he produced  into    Court  three
complaints  received by the Government which are  marked  as
Annexures ‘A’ to ‘C’.  Shri Datta does not claim to have any
personal knowledge of the facts of this case.  Therefore the
only  additional material that is placed before us  are     the
three annexures marked as Annexures ‘A’ to ‘C’.     Shri  Niren
De,  learned  Attorney stated before us that  the  Union  of
India had placed before the Court all the relevant  material
it possessed bearing on the subject.
Annexure  ‘A’ is said to have been submitted in June,  1960.
Most  of  the  allegations contained therein  are  of  vague
character.   It     was conceded by the learned  Attorney    that
those  allegations could not have been the basis for  making
the impugned order.  ‘Therefore it is not necessary to refer
to  them in extension One of the concrete  allegations    made
therein-on which allegation alone some half hearted reliance
was  placed  at     the hearing-is that  though  the  appellant
company had a debenture capital of Rs. 48,50,000, on  31-12-
39, Shreeram Harjimal, a father concern of Dalmia Jain Group
had  pledged in various Banks debentures of  the  appellant-
company of the value of Rs. 1,07,47,000 and-raised a loan of
nearly    rupees one crore.  According to the  complaint    this
must  have  been  done    by  forging  some  documents.     The
complaint  further  stated that     the  appellant-company     has
facilitated  that  fraud by paying interest  on     the  entire
loans borrowed.     The above allegation has been denied by the
appellant  in the reply affidavit filed on its behalf.     Mr.
Attorney  conceded that the impugned order -could  not    have
been made on the basis of this alle-
115
gation as it directed an inquiry into the company’s  affairs
primarily  for    the period subsequent to  1-4-1958  and     the
allegation  in    question relates to transactions  that    took
place  in  about  the  year 1939 but at     the  same  time  he
contended  that     the  allegation in  question  afforded     the
necessary  background  in assessing the     other    allegations.
Some of the allegations contained in that complaint such  as
the levy of Rs. 50 lacs fine on S. P. Jain should have    been
known  to  the    Government to be incorrect in  view  of     the
various proceedings that had taken place earlier which    were
within the knowledge of the Government.
In  Annexure  ‘B’ there are no    specific  allegations.     The
learned     Attorney  did not rely on any    of  the     allegations
contained therein as having formed the basis for issuing the
impugned order.
Annexure  ‘C’ is a complaint relating to the working of     New
Central     Jute Mills Co., Ltd. it makes no reference  to     the
appellant-company.   We were told that the New Central    Jute
Mills Co. Ltd. is a sister concern of the appellant-company.
In paragraph 4 of that complaint following allegations    were
made :
“The investments of the Company in Albion Ply-
Woods   Ltd.  and     their    variations  by     the
Company’s Managing Agents appear to have    been
done  to    benefit the Managing  Agents,  their
friends  and  brokers, at the expense  of     the
shareholders.  It appears that the  preference
shares in this company were sold at the market
rate  of    Rs.  100 each when  these  could  be
converted into ordinary shares of Rs. 10    each
which were then quoting at Rs. 15 in the stock
market.    This  and  various  other  acts      of
deliberate commissions and omissions require a
thorough investigation so that shareholders in
general may have a feeling of security in     the
company.”
It  appears that Albion Plywoods Ltd. at the  relevant    time
had  a subscribed capital of rupees ten lacs made up of     Rs.
50,000 ordinary shares of the face value of Rs. 10 each     and
Rs.  5,000  preference shares of the face value of  Rs.     100
each.    Though    the  preference shares    were  not  by  right
convertible  into ordinary shares, it appears in  about     the
end of April or beginning of May, 1960, the Albion  Plywoods
Ltd.  gave  notice  of a special resolution  to     permit     the
conversion of the preference shares into ordinary shares and
the said resolution was passed by the General Meeting on May
20,  1960.  On May 6, 1960 the appellant-company which    held
3,000 preference shares of the Albion Plywoods Ltd. sold the
same to M/s.  Bagla & Co. for the face value.  Annexure     ‘C’
was   forwarded     to  the  Regional  Director,  Company     Law
Administration,     Calcutta for inquiry and report.   At    this
stage  it  may    be noted that the inquiry  in  question     was
directed  against the New Central Jute Mills Co.,  Ltd.     and
not against the appel-
116
lant company.  The Regional Director submitted his report on
November  1  0,     1961.    In his report  he  opined  that     the
transaction  complained     of is of a doubtful  character     and
therefore  further  inquiry  is     desirable.   Thereafter  on
December  2,  1961 the UnderSecretary to the  Government  of
India wrote to the Regional Director asking for some further
information.   One  of the points on which  information     was
called    for  was whether Sahu Jain’s Co’s  (other  than     New
Central     Jute Mills Co. Ltd.) who were holding 3,000  shares
of Albion Plywoods Ltd. had also transferred their shares to
Bagla & Co./Podar and Sons and to give full details thereof.
The  Regional Director was also asked to report whether     the
preference  shares of the Albion Plywoods Ltd.    carried     any
voting    rights    before conversion.  In that  letter  it     was
further observed :
“In this regard it is suggested that  discreet
enquiries may be made to find out the names of
the  partners of Bagla and Company and  Poddar
Sons  and also whether, the said brokers    were
actively    associated with the Sahu Jains.      If
considered necessary, the help of the  Officer
of  the Stock Exchange Division of the  E.  A.
Department recently posted at Calcutta may  be
sought in this regard.”
On  January 29, 1962, the Regional Director replied to    that
letter. In his reply he stated :
“I  have    been able to  gather  the  following
information  regarding  the  3,000  preference
shares of Rs. 100 each of Albion Plywoods Ltd.
The preference shares were acquired by  Rohtas
Industries  Ltd.    (A  Sahu  Jain    Company)  on
allotment     by the Albion Plywood Ltd. of    such
shares on 15th June, 1951.  These 3,000 prefe-
rence shares were sold to M/s Bagla & Co.,
on  6th May, 1960 at par for Rs. 3  lacs.      It
would  appear  that  these  shares  were    sold
before  20th May, 1960 the date on  which     the
preference shares were converted into ordinary
shares.”
The Regional Director in his letter of 10th November,  1961,
had  given the market quotations for the ordinary shares  of
Albion    Plywoods  Ltd. on some of the dates  in     May,  1960.
According to him those quotations were gathered from ‘Indian
Finance’.  Evidently as he was inquiring into the  complaint
made against the New Central Jute Mills Co. Ltd. he did     not
mention     the  market quotation for the    shares    in  question
either    on  May     6, 1960 or immediately     before     that  date.
During    the hearing of these appeals an affidavit  has    been
filed  on  behalf of the appellant stating that     the  market
quotation of the ordinary share in the Albion Plywoods    Ltd.
on May 6, 1960 or immediately before that date was Rs. 1 1.
117
Alongwith  that affidavit, the relevant copy of     the  Indian
Finance     was produced.’ It was not disputed before  us    that
the  market  quotation    for the ordinary  shares  of  Albion
Plywoods  Ltd. on or immediately before May 6, 1960 was     Rs.
11 per share.  At this stage it may be mentioned that though
the Under Secretary to the Government required the  Regional
Director  to find out the names of the partners of  Bagla  &
Co. and whether, the brokers who dealt with the shares    were
actively associated with Sahu Jain, it does not appear    that
the   Regional     Director   supplied   those    information.
Admittedly there was no material before the Government    when
it  issued  the     impugned order from  which  it     could    have
reasonably  drawn  the conclusion that    the  transaction  in
favour    of Bagla & Co. was either a nominal  transaction  or
was  made  with     a  view to  profit  the  Directors  of     the
appellant-company  or  their relations.      According  to     Mr.
Attorney  the  only circumstance on the basis of  which     the
Government  passed the impugned order was the sale of  3,000
preference  shares  of    Albion Plywoods     Ltd.  held  by     the
appellant-company  though, according to him, the  Government
viewed    that circumstance in the background of    the  various
complaints received by it against Mr. S. P. Jain who was  at
that  time one of the prominent Directors of the  appellant-
company, New Central Jute Mills Co. Ltd. and Albion Plywoods
Ltd.,  as  well     as  the report     made  by  the    Vivian    Bose
Commission  which inquired into the affairs of some  of     the
companies   with  which     Mr.  S.  P.  Jain  was      connected.
Admittedly  Vivian Bose Commission did not inquire into     the
affairs of the appellant-company nor does its report contain
anything about the working of that company nor was there any
complaint against the appellant-company excepting that    made
in Annexure ‘A’.
On  the basis of the above facts we have now to see  whether
the  Government     was competent to pass the  impugned  order.
Sections 235 to 237 of the Act are allied sections and    they
form  a     scheme.  They deal with the  investigation  of     the
affairs     of the company.  To find out the true scope  of  S.
237  (b),  it is necessary to take  into  consideration     the
provisions contained in S. 235 as well as 236.    They read :
“235.  Investigation of affairs of company  on
application   by     members   or    report      by
Registrar.-The Central Government may  appoint
one or more competent persons as inspectors to
investigate the affairs of any company and  to
report  thereon in such manner as the  Central
Government may direct,-
(a)   in the case of a company having a  share
capital, on the application either of not less
than two hundred members or of members holding
not  less than one-tenth of the  total  voting
power therein;
118
(2)in the case of a company not having a share
capital,    on the application of not less    than
one-fifth     in  number of the  persons  on     the
company’s register of members;
(c)   in the case of any company, on a  report
by  the  Registrar under sub-section  (6),  or
sub-section (7) read with sub-section (6),  of
section 234.
236.  Application     by members to be  supported
by evidence and power to call for     security-An
application  by  members of  a  company  under
clause  (a)  or (b) of section  235  shall  be
supported     by  such evidence  as    the  Central
Government  may  require for  the     purpose  of
showing  that the applicants have good  reason
for  requiring  the  investigation;  and     the
Central  Government may, before appointing  an
inspector,  require  the    applicants  to    give
security,     for such amount not  exceeding     one
thousand    rupees    as  it may  think  fit,     for
payment of the costs of the investigation.”
The  power conferred on the Central Government under S.     235
as well as under s. 237(b) is a discretionary power  whereas
the  Central  Government  is bound to 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 the    company     by  special
resolution  or the Court by order declares that the  affairs
of  the     company ought to be investigated  by  an  Inspector
appointed by the Central Government [237 (a) (i) (ii) ].  It
may  be     noted that before the Central Government  can    take
action    under  s.  235 certain    pre-conditions    have  to  be
satisfied.  In the case of an application by members of     the
company     under cl. (a) or (b) of S. 235, the same will    have
to  be supported by such evidence as the Central  Government
may  require for the purpose of showing that the  applicants
have  good reasons for requiring the investigation, and     the
Central     Government  may, before  appointing  an  Inspector,
require     the applicant to give security for such amount     not
exceeding  Rs. 1,000 as it may think fit for payment of     the
costs  of the investigation.  From the provisions  contained
in ss. 235 and 236 it is clear that the legislature  consid-
ered  that investigation into the affairs of a company is  a
very  serious matter and it should not be ordered except  on
good  grounds.    It is true that the investigation  under  s.
237(b) is of a fact finding nature.  The report submitted by
the Inspector does not bind anybody.  The Government is     not
required to act on the basis of that report, the company has
to be called upon to have its say in the matter but yet     the
risk-it     may  be a grave one-is that the appointment  of  an
Inspector  is  likely to receive much press publicity  as  a
result of which the reputation and prospects of the com-
119
pany may be adversely affected.     It should not therefore  be
ordered except on satisfactory grounds.
Before taking action under S. 237(b)(i) and (ii), the  Cent-
ral Government has to form an opinion that there are circum-
stances suggesting 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 to any member or that     the
company was formed for any fraudulent or unlawful purpose or
that   the  persons  concerned    in  the     formation  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.
From  the  facts  placed before us, it    is  clear  that     the
Government  had     not bestowed sufficient  attention  to     the
material  before it before passing the impugned     order.      It
seems  to  have been oppressed by the opinion  that  it     had
formed    about Shri S. P. Jain.    From the arguments  advanced
by Mr. Attorney, it is clear that but for the association of
Mr. S. P. Jain with the appellant-company, the investigation
in  question,  in  all probabilities  would  not  have    been
ordered.   Hence,  it is clear that in making  the  impugned
order  irrelevant  considerations have played  an  important
part.
The  power  under ss. 235 to 237 has been conferred  on     the
Central Government on the faith that it will be exercised in
a   reasonable    manner.      The  department  of  the   Central
Government  which deals with companies is presumed to be  an
expert body in company law matters.  Therefore the  standard
that  is  prescribed  under S. 237(b) is  not  the  standard
required of an ordinary citizen but that of an expert.     The
learned     Attorney  did not dispute the position that  if  we
come  to the conclusion that no reasonable  authority  would
have  passed the impugned order on the material     before     it,
then the same is liable to be struck down.  This position is
also  clear  from  the    decision of  this  Court  in  Barium
Chemicals and Anr. v. Company Law Board and Anr.(1).
It was urged by Mr. Setalvad, learned Counsel for the appel-
lant that cl. (b) of S. 237 prescribes two requirements i.e.
(1) the requisite opinion of the Central Government and     (2)
the existence of circumstances suggesting that the company’s
business was being conducted as laid down in sub-cl. (1)  or
that  the  persons mentioned in sub-cl. (2) were  guilty  of
fraud, misfeasance or misconduct towards the company or     any
of  its members.  According to him though the opinion to  be
formed     by  the  Central  Government  is  subjective,     the
existence of circumstances set out in cl. (b) is a condition
precedent to the formation of such opinion and therefore the
fact that the impugned order contains recitals of
(1) [1966] Supp. S.C.R.311
120
the existence of those circumstances, does not preclude     the
court  from  going  behind those  recitals  and     determining
whether     they  did  in fact exist and  further    whether     the
Central     Government  in     making that order  had     taken    into
consideration  any extraneous consideration.  But  according
to  the learned Attorney the power conferred on the  Central
Government under cl. (b) of s. 237 is a discretionary  power
and the opinion formed, if in fact an opinion as required by
that section has been formed, as well as the basis on  which
that  opinion  has  been formed are  not  open    to  judicial
review.     In other words according to the learned Attorney no
part of s. 237(b) is open to judicial review, the matter  is
exclusively within the discretion of the Central  Government
and the statement that the Central Government had formed the
required opinion is conclusive of the matter.
Courts both in this country as well as in other Commonwealth
countries  had occasion to consider the scope of  provisions
similar     to  s. 237 (b).  Judicial dicta found    in  some  of
those decisions are difficult of reconciliation.
The  decision  of this Court in     Barium     Chemicals’  case(1)
which  considered  the scope of s. 237(b)  illustrates    that
difficulty In that case Hidayatullah, J. (our present  Chief
Justice)  and Shelat, J. came to the conclusion that  though
the power under s. 237(b) is a discretionary power the first
requirement  for its exercise is the honest formation of  an
opinion that the investigation is necessary and the  further
requirement is that “there are circumstances suggesting” the
inference  set    out in the section; an action not  based  on
circumstances suggesting an inference of the enumerated kind
will  not  be  valid;  the  formation  of  the    opinion      is
subjective  but the existence of the circumstances  relevant
to  the     inference as the sine qua non for  action  must  be
demonstratable; if their existence is questioned, it has  to
be  proved  at least prima facie; it is     not  sufficient  to
assert    that those 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.    In other words    they
held  that although the formation of opinion by the  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 the conclusion set out
in  sub-cls.  (i),  (ii)  and (iii) of    S.  237(b)  and     the
expression  “circumstances  suggesting” cannot    support     the
construction  that even the existence of circumstances is  a
matter    of subjective opinion.    Shelat, J. further  observed
that  it is hard to contemplate that the  Legislature  could
have left to the subjective
(1) [1966] Supp. S.C.R. 311
121
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.
On  the other hand Sarkar, C.J. and Mudholkar, J. held    that
the  power  conferred  on the Central  Government  under  S.
237(b)    is a discretionary power and no facet of that  power
is  open to judicial review.  Our brother Bachawat, J.,     the
other  learned    Judge  in that Bench  did  not    express     any
opinion      on   this  aspect  of     the  case.    Under   these
circumstances it has become necessary for us to sort out the
requirements  of  s.  237(b) and to see     which    of  the     two
contradictory  conclusions  reached  in     Barium      Chemicals’
case(1) is in our judgment, is according to law.  But before
proceeding  to analyse s. 237(b) we should like to refer  to
certain     decisions cited at the bar bearing on the  question
under consideration.
We  shall  first  take up the decisions read to     us  by     the
learned Attorney.
In  State  of Madras v. C. P. Sarathy  and  Another(2)    this
Court  was called upon to consider the scope of S. 10(1)  of
the  Industrial Disputes Act, 1947.  There the question     for
decision  was  whether    the  opinion  formed  by  the  State
Government that there existed an industrial dispute is    open
to  judicial review.  While dealing with that question    this
Court observed
“But  it must be remembered that in  making  a
reference     under    S. 10(1) the  Government  is
doing an administrative act and the fact    that
it  has to form ail opinion as to the  factual
existence     of  an     industrial  dispute  as   a
preliminary  step     to  the  discharge  of     its
function    does  not  make     it  any  the    less
administrative   in  character.    The   Court,
cannot,    therefore,  canvass  the  order      of
reference     closely  to see if  there  was     any
material before the Government to support     its
conclusion, as if it was a judicial or  quasi-
judicial    determination no doubt, it  Will  be
open   to     a  party  seeking  to    impugn     the
resulting award to show that what was referred
by the     Government  was not  an  industrial
dispute  within  the meaning of the  Act,     and
that,   therefore,   the     Tribunal   had      no
jurisdiction  to make the award.    But, if     the
dispute  was an industrial dispute as  defined
in  the  Act, its factual     existence  and     the
expediency  of  making  a     reference  in     the
circumstances of a particular case are matters
entirely for the Government to decide
upon,
(1)  [1966] Supp.  S.C.R. 31 1.
7Sup.CI/69-9
(2) [1953] S.C.R. 334
122
and it will not be competent for the Court  to
hold   the   reference  bad  and     quash     the
proceedings  for want of    jurisdiction  merely
because there was, in its opinion, no material
before  the Government on which it could    have
come  to    an affirmative conclusion  on  those
matters.”
This interpretation of s. 10(1) is based on the language  of
that provision as well as the purpose for which the power in
question  was  given and the effect of    a  reference.    That
decision  cannot  be  considered as  an     authority  for     the
proposition that whenever a provision of law confers certain
power  on an authority on its forming a certain     opinion  on
the  basis  of certain facts the courts are  precluded    from
examining  whether the relevant facts on the basis of  which
the opinion is said to have been formed had in fact existed.
Reliance  was next placed on the decision of this  Court  in
Joseph    Kuruvilla Vellukunnel v. The Reserve Bank  of  India
and  Ors.(1) wherein this Court was called upon     to  examine
the  vires -of s. 3 8 ( 1 ) and 3 (b) (iii) of    the  Banking
Companies  Act,     1949.    Kapur, and Shah, JJ. held  that     the
provisions  in question are ultra vires the Constitution  as
the  power  conferred on the Reserve Bank is  an  arbitrary,
power  whereas    the  majority  consisting  of  Sinha,  C.J.,
Hidayatullah  and Mudholkar, JJ. upheld the validity of     the
provisions  on    the ground that the power conferred  on     the
Reserve      Bank    is  a  reasonable  restraint   taking    into
consideration  the interests of the public and the  position
occupied by the Reserve Bank in the financial system of this
country     We  do not think that this decision  bears  on     the
point under consideration.
In  Hubli Electricity Company Ltd. v. Province of  Bombay(2)
the  Judicial  Committee  came to the  conclusion  that     the
opinion     to be formed by the Provincial Government under  s.
4(1)  of  the Indian Electricity Act, 1910 is  a  subjective
opinion     and  the  same     ,cannot  be  adjudged    by  applying
objective tests.  The relevant portion of section 4(1) reads
:
“The  Provincial    Government may,     if  in     its
opinion  the  public  interest  so   requires,
revoke  a     licence  in any  of  the  following
cases, namely –
(a)   where the licensee in the opinion of the
Provincial   Government    makes    wilful     and
unreasonably   prolonged    default      in   doing
anything    required  of him by  or     under    this
Act. . . . ”
Dealing with the scope of that provision their
Lordships observed
“Their Lordships are unable to see that  there
is any-
thing in the language of the sub-section or in
the subject
(1) [1962] Supp.3,S.C.R.632.
(2) L.R. (1948-49) 76.  I.A. 57.
matter  to which it relates on which to  found
the   suggestion    that  the  opinion  of     the
Government  is  to  be  subject  to  objective
tests.   In terms the relevant matter  is     the
opinion of the government–not the grounds  on
which  the  opinion is  based.   The  language
leaves no room for the relevance of a judicial
examination  as  to  the    sufficiency  of     the
grounds  on  which  the  government  acted  in
forming  an opinion.  Further the question  on
which   the  opinion  of    the  government      is
relevant    is  not whether a default  has    been
wilful and unreasonably prolonged but  whether
there has been a wilful and unreasonably    pro-
longed default.  On that point the opinion  is
the  determining matter, and-if it is not     for
good cause displaced as a relevant  opinion-it
is conclusive.”
It  may be remembered that therein the,     Judicial  Committee
was considering a pre-constitutional provision which was not
subject     to the mandate of Art. 1 9 (1) (g).  Further  their
Lordships were careful enough to observe :
“that  they  are unable to see that  there  is
anything in the language of the sub-section or
in  the subject matter to which it relates  on
which to found the suggestion that the opinion
of  the government is to be subject to  objec-
tive tests.”
In  other  words  in their Lordship’s  opinion    the  subject
matter    of  a legislation has an important  bearing  in     the
interpretation of a provision.    We may also add that s. 4(1)
of  the Electricity Act 1910 stood by itself and in  finding
out  its scope no assistance could have been taken from     any
other provision in that Act.
In Rabinson v. Minister of Town     and Country Planning(1) the
declaratory order made by the Minister that he was satisfied
that  the  area comprised in the order should be  ‘laid     out
afresh    and  re-developed as a whole’ was held not  open  to
judicial  review.   The     order    in  question  to  an  extent
depended on questions of policy.  It is not open for  courts
to decide questions of policy.
In Point of Ayr Collieries Ltd. v. Lloyd George(2) the Court
of  -Appeal upheld the contention that – the order  made  by
the  Minister of Fuel and Power under the defence  (General)
Regulations  No.  55  (4)  assuming  the  management  of  an
undertaking was not open to judicial review.  In arriving at
the  decision it is clear that the court was  influenced  by
the  decision  of  the    House  of  Lords  in  Liversidge  v.
Anderson(,’)  and  Greene  v.  Home  Secretary    (4  )  which
considered the validity of detentions during war time.     The
decisions  cannot serve as real guide for  interpreting     the
provision of law with which we are concerned.
(1)  [1947] 1 K.B. 702. (3)   [1941] 3 All E.R. 338.
(2)  [1943] 2 All E.R. 546. (4)       [1941] 3 All E.R. 388.
124
We shall now refer to the decisions relied on by the  appel-
lant.
As  long back as 1891 the House of Lords was called upon  to
consider  the  scope  of  some    of  the     provisions  of     the
Licensing Act 1872 which gave discretion to the     Magistrates
in granting certain licenses.  The question for decision was
as  to the nature of the discretion granted.  Lord  Halsbury
L. C. speaking for the House observed, in Susannah Sharp  v.
Wakefield and Ors. (1).
“     ‘discretion’  means when it  is  said    that
something is to be done within the  discretion
of  the authorities that that something is  to
be  done according to the rules of reason     and
justice,    not according to private  opinion  :
Rooke’s  case;  according     to  law,  and     not
humour.  It is to be, not arbitrary, vague and
fanciful, but legal and regular.”
In Nakkuda Ali v. M. F. De S. Jayaratna(2) the Judicial Com-
mittee    in interpreting the words “where the Controller     has
reasonable grounds to believe that any dealer is unfit to be
allowed     to continue as a dealer” found in Regulation 62  of
the Defence (Control of Textiles) Regulations, 1945 observed
:
“After  all, words such as these are  commonly
found   when  a  legislature   or      law-making
authority     confers  powers on  a    minister  or
official.     However read, they must be intended
to serve in some sense as a condition limiting
the exercise of an otherwise arbitrary  power.
But if the question whether the condition     has
been  satisfied is to be conclusively  decided
by  the man who wields the power the value  of
the  intended restraint is in effect  nothing.
No doubt he must not exercise the power in bad
faith  : but the field in which this  kind  of
question    arises is such that the     reservation
for the case of bad faith is hardly more    than
a formality.  Their Lordships therefore  treat
the  words in reg. 62, ‘where  the  Controller
has  reasonable  grounds to believe  that     any
dealer is unfit to be allowed to continue as a
dealer’  as  imposing a condition     that  there
must  in fact exist such    reasonable  grounds,
known to the Controller before he can  validly
exercise the power of cancellation.”
The  decision of the House of Lords in Padfield and Ors.  v.
Minister  of Agriculture, Fisheries and Food and Ors.(3)  is
of considerable importance.  Therein the material facts     are
these :
The  appellants     in that appeal, members of the     south    east
regional committee of the Milk Marketing Board, made a com-
(3)  [1968] 1 All E.R. 694.
125
plaint    to the Minister of Agriculture, Fisheries and  Food,
pursuant  to  S. 19(3) of the  Agricultural  Marketing    Act,
1958, asking that the complaint be referred to the committee
of  investigation  established under  that  enactment.     The
complaint was that the board’s terms and prices for the sale
of  milk  to  the  board did not  take    fully  into  account
variations  between producers and the cost of bringing    milk
to  a liquid market.  In effect the complaint was  that     the
price differential worked unfairly against the producers  in
the popular south east region, where milk was more valuable,
the  cost  of transport was less and the price of  land     was
higher.     There had been many previous requests to the board,
but  these had failed to get the board, in which  the  south
east producers were in a minority, to do anything about     the
matter.      The Minister declined to refer the-matter  to     the
committee.  By letters of May 1, 1964 and March 23, 1965, he
gave  reasons which included that (in effect) his main    duty
had been to decide the suitability of the complaint for such
investigation  but that it was one which raised wide  issues
and  which  he did not consider suitable for  such  investi-
gation,      as  it  could     be  settled  through    arrangements
available  to  producers  and  the  board  within  the    milk
marketing  scheme;  that he had unfettered  discretion,     and
that,  if  the complaint were upheld by     the  committee,  he
might  be expected to make a statutory order to give  effect
to  the committee’s recommendations.  Section 19(3)  (b)  of
the Agricultural Marketing Act, 1958 read
“A committee of investigation shall be charged
with the duty, if the Minister in any case  so
directs, of considering, and reporting to     the
Minister, on any report made by the consumers’
committee     and  any  complaint  made  to     the
Minister    as  to the operation of     any  scheme
which,  in the opinion of the Minister,  could
not  be considered by a  consumers’  committee
under the last foregoing subsection.”
The appeal was allowed by the House of Lords (Lord Morris of
Borth-Y-Gest  dissenting).  Lord Reid and Lord    Pearce    held
that  where a statute conferring a discretion on a  Minister
to  exercise  or not to exercise a power did  not  expressly
limit  or  define the extent of his discretion and  did     not
require     him to give reasons for declining to  exercise     the
power,    his discretion might nevertheless be limited to     the
extent    that  it must not be so used, whether by  reason  of
misconstruction     of  the  statute or  other  reason,  as  to
frustrate  the    object of the statute  which  conferred     it.
Lord Hodson and Lord Upjohn held that although the  Minister
had  full  or unfettered discretion under s.  19(3)  of     the
Agricultural  Marketing Act, 1958, he was bound to  exercise
it  lawfully  viz. not to misdirect himself in law,  nor  to
take  into account irrelevant matters, nor to omit  relevant
matters from consideration.
126
In  the course of his speech Lord Hodson    made
the following observations :
“If  the    Minister has a    complete  discretion
under  the Act of 1958, as in my    opinion,  he
has, the only question remaining is whether he
has  exercised  it lawfully.  It    is  on    this
issue that much difference of Judicial opinion
has  emerged, although there is no  divergence
of  opinion  on  the relevant  law.   As    Lord
Denning  M.R. said citing Lord Greene M.R.  in
Associated  Provincial Picture Houses Ltd.  v.
Wednesbury Corpn. (1).
“     a person entrusted with a  discretion    must
direct himself properly in law.  He must    call
his  own attention to the matters which he  is
bound  to consider.  He must exclude from     his
consideration matters which are irrelevant  to
the -matter that he has to consider’
Lord Pearce in his speech observed :
“If all the prima facie reasons seem to  point
in  favour of his taking a certain  course  to
carry  out  the intentions  of  Parliament  in
respect  of a power which it has given him  in
that  regard, and he gives no reason  whatever
for  taking a contrary course, the  court     may
infer that he has no good reasons and that  he
is not using the power given by Parliament  to
carry out its intentions.     In the present case
however  the Minister has given reasons  which
show that he was not exercising his discretion
in  accordance with the intentions of the     Act
of 1958.
In   the    present     case  it  is    clear    that
Parliament attached considerable importance to
the independent committee of investigation  as
a     means to censure that injustices  were     not
caused  by  the  operation  of  a      compulsory
scheme.”
Lord Upjohn observed
“My  Lords, on the basic principles of law  to
be  applied  there was no real  difference  of
opinion,    the  great question being  how    they
should be applied to this case.  The  Minister
in exercising his powers and duties  conferred
on him by statute can only be controlled by  a
prerogative order which will only issue if  he
acts  unlawfully.     Unlawful behaviour  by     the
Minister     may  be  stated   with      sufficient
accuracy    for  the  purposes  of    the  present
appeal (and here I adopt the classification of
Lord Parker C.J. in the divisional court): (a)
by an
(1)   [1947] 2, All E.R. 682.
127
outright    refusal     to  consider  the  relevant
matter;  or  (b) by  misdirecting     himself  in
point  of law, or (c) by taking  into  account
some  wholly  irrelevant    or  extraneous    con-
sideration, or (d) by wholly omitting to    take
into account a relevant consideration.   There
is  ample     authority  for     these    propositions
which  were  not challenged in  argument.      In
practice    they  merge  into  one    another     and
ultimately  it becomes a question whether     for
one  reason or another the Minister has  acted
unlawfully   in  the  sense  of    misdirecting
himself in law, that is, not merely in respect
of some point of law but by failing to observe
the other headings which I have mentioned.”
In  Commissioners of Customs and Excise v. Cure     and  Deeley
Ltd.(1) the power given to the Commissioners under S.  33(1)
of the Finance Act, 1940 “to make regulations providing     for
any  matter  for  which     provision appears  to    them  to  be
necessary for the purpose of giving effect to the provisions
of  this Part of the Act and of enabling them  to  discharge
their  functions  thereunder . . . . . . ” was held  not  to
make  that authority the sole judge of what its powers    were
as  well  as  the sole judge of the way in  which  it  could
exercise such powers as it might have.    Sachs, J. who  spoke
for the Court observed the legal position thus :
“In  the first place I reject the  view    that
the words appear to them to be necessary’ when
used  in    a  statute conferring  powers  on  a
competent     authority,  necessarily  make    that
authority     the  sole  judge of  what  are     its
powers as well as the sole judge of the way in
which  it can exercise such powers as  it     may
have.   It  is axiomatic that, to     follow     the
words  used by Lord Radcliffe in the  Canadian
case  ‘the paramount rule remains     that  every
statute  is to be expounded according  to     its
manifest    or expressed intention’.  It  is  no
less  axiomatic that the application  of    that
rule  may     result     in  phrases  identical      in
wording    or  in    substance  receiving   quite
different     interpretations  according  to     the
tenor of the legislation under  consideration.
As an apt illustration of such a result it  is
not necessary to go further than Liversidge v.
Anderson(2)  and Nakkuda Ali  v.    Jayaratne(3)
which  cases  the words ‘reasonable  cause  to
believe’    and ‘reasonable grounds to  believe’
received quite different interpretations.
To my mind a court is bound before reaching  a
decision on the question whether a  regulation
is intra vires to examine the nature, objects,
and scheme of the
(1) [1962] 1 Q.B. 340.
(3) [1951] A.C.66.
(2) [1942] A.C. 206
128
.lm15
piece  of  legislation as a whole and in the light  of    that
examination to consider exactly what is the area over  which
powers    art given by the section under which  the  competent
authority is purporting to act.”
In  Roncarelli    v.  Duplessis(1),  while  dealing  with     the
discretionary  power  of  the Quebec  Liquor  Commission  to
cancel a liquor licence this is what Rand, J. observed :
“A  decision to deny or cancel such a privilege lies  within
the  ‘discretion’  of the Commission; but  that     means    that
decision  is to be based upon a weighing  of  considerations
pertinent to the object of the administration.
In public regulation of this sort there is no such thing  as
absolute  and untrammeled ‘discretion’ that is    that  action
can  be     taken on any ground or for any reason that  can  be
suggested  to mind of the administrator; no legislative     Act
can,  without express language, be taken to  contemplate  an
unlimited  arbitrary  power  exercisable  for  any  purpose,
however     capricious or irrelevant, regardless of the  nature
or  purpose  of the statute.  Fraud and     corruption  in     the
Commission  may not be mentioned in such statutes  but    they
are always implied as exceptions.  ‘Discretion’     necessarily
implies good faith in discharging public duty; there is     al-
ways  a     perspective within which a statute is    intended  to
operate;  and any clear departure from its lines or  objects
is  just as objectionable as fraud or corruption.  Could  an
applicant  be refused a permit because he had been  born  in
another province, or because of the colour of his hair?     The
ordinary   language   of  the  legislature  cannot   be      so
distorted.”
In  particular    we would like to emphasize  the     observation
that  “there is always a perspective within which a  statute
is intended to operate”.
In Read v. Smith (2) it was held that the Governor-General’s
power under the-Education Act to make such regulations as he
“thinks     necessary to secure the due administration” of     the
Act  has  been    held invalidly exercised in so    far  as     his
opinion     as  to the necessity for such    regulation  was     not
reasonably tenable.
Coming    back to s. 237(b), in finding out its true scope  we
have  to  bear in mind that that section is a  part  of     the
scheme referred to earlier and therefore the said  provision
takes  its colour from ss. 235 and 236.     In finding out     the
legislative intent we
(1)  [1959] S.C.R. (Canada Law Reports) 121.
(2)  [1959] New Zealand Law Reports 996.
129
cannot    ignore    the  requirements  of  those  sections.      ln
interpreting  S. 237(b) we cannot ignore the adverse  effect
of  the investigation on the company.  Finally we must    also
remember  that the section in question is an inroad  on     the
powers of the company to carry on its trade or business     and
thereby an infraction of the fundamental right guaranteed to
its shareholders under Art. 1 9 (1 ) (g)     and     its
validity  cannot be upheld unless it is considered that     the
power  in  question  is     a  reasonable    restriction  in     the
interest of the        general  public.  In fact the  vires  of
that  provision     was  upheld  by  majority  of    the   Judges
constituting   the  Bench  in  Barium    Chemicals’   case(1)
principally  on the ground that the power conferred  on     the
Central     Government is not an arbitrary power and  the    same
has  to be exercised in accordance with the  restraints     im-
posed by law.  For the reasons stated earlier we agree    with
the  conclusion reached by Hidayatullah, and Shelat, JJ.  in
Barium     Chemicals’(1)     case    that   the   existence      of
circumstances  suggesting  that the company’s  business     was
being  conducted as laid down in sub-cl.(1) or    the  persons
mentioned in sub-cl.(2) were guilty of fraud or     misfeasance
or  other misconduct towards the company or towards  any  of
its  members is a condition precedent for the Government  to
form  the  required opinion and if the    existence  of  those
conditions is challenged, the courts are entitled to examine
whether those circumstances were existing when the order was
made.  In other words, the existence of the circumstances in
question  are  open to judicial review    though    the  opinion
formed    by the Government is not amenable to review  by     the
courts.     As held earlier the required circumstances did     not
exist in this case.
Next question is whether any reasonable authority much    less
expert     body  like  the  Central  Government    could    have
reasonably  made  the  impugned order on the  basis  of     the
material  before it.  Admittedly the only relevant  material
on the basis of which the impugned order can be said to have
been made is the transaction of sale of preference shares of
Albion    Plywoods Ltd.  At the time when the Government    made
the impugned order, it did not know the market quotation for
the  ordinary  share of that company as on the date  of     the
sale of those shares or immediately before that date.    They
did not care to find out that information.  Hence there     was
no  material  before them showing that they  were  sold     for
inadequate  consideration.   If as is now  proved  that     the
market    price  of those shares on or about May 6,  1960     was
only  Rs.   11 per share then the  transaction    in  question
could  not have afforded any basis for forming    the  opinion
required  by S. 237(b).     If the market price of an  ordinary
share of that company on or about May 6, 1960 was only Rs. 1
1 it was quite reasonable for the Directors to conclude that
the  price  of the ordinary shares is likely to go  down  in
view of the company’s proposal to put on the mar-
(1)  [1966] Supp.  S.C.R. 311.
130
ket  another 50,000 shares as a result of the conversion  of
the preference shares into ordinary shares.  We do not think
that  any reasonable person much less any expert  body    like
the Government, on the material before it, could have jumped
to  the conclusion that there was any fraud involved in     the
sale  of the shares in question.  If the Government had     any
suspicion about that transaction it should have probed    into
the  matter further before directing any investigation.      We
are  convinced    that the precipitate, action  taken  by     the
Government was not called for nor could be justified-on     the
basis of the material before it.  The opinion formed by     the
Government  was a wholly irrational opinion.  The fact    that
one of the leading Directors of the appellant company was  a
suspect     in  the  eye  of  the    Government  because  of     his
antecedents, assuming without deciding, that the allegations
against him are true, was not a relevant circumstance.    That
circumstance  should  not  have been allowed  to  cloud     the
opinion     of the Government.  The Government is charged    with
the responsibility to form a bona fide opinion on the  basis
of  relevant  material.      The opinion formed  in  this    case
cannot be held to have been formed in accordance with law.
In  the     result     we allow these appeals and  set  aside     the
impugned order.     The respondents shall pay the costs of     the
appellant  both in this Court as well as in the     High  Court
(Hearing fee one set).
Bachawat, J. The Central Government is authorized to appoint
an  inspector to investigate the affairs of a company  under
s. 235 clauses (a) and (b) of the Companies Act, 1956 on the
applications of its members, under s. 235 clause (a) on     the
report of the Registrar, under s. 237 clause (a)  sub-clause
(i)  if     required by a special resolution  of  the  company,
under  s. 237 clause (a) sub-clause (ii) if directed by     the
court  and under s. 237 clause (b) if the Government  is  of
the   opinion  that  there  -are  circumstances      suggesting
malpractices  in  relation to the  company’s  affairs.     The
investigation is mandatory under s. 235 clause (a) if it  is
required  by  the company’s special resolution,     see  R.  v.
Board of Trade Exp.  St. Martin Preserving Co. Ltd.(2) or if
the Court so directs.  The Court has a discretion to  direct
the investigation on being satisfied that the affairs of the
company     should     be investigated, Re Miles  Aircrafts  Ltd.,
(No. 2)(2).  The investigation is a fact finding inquiry and
its object is to ascertain whether in fact malpractices have
been  committed     in relation to the company’s  affairs,     see
Raja  Narayanlal Bansilal v. Manak Phiroz Mistry &  Anr.(3).
On a consideration of the inspector’s report, the Government
can  take appropriate action against the  delinquents  under
ss. 242, 243 and 244.
[1955] 1 Q.B,693,515.       (2) [1948] W.N.178.
(3)  [1961] 1 S.C.R.417,430-6.
131
Section     237(b)     provides that the  Central  Government     may
appoint     one  or  more competent persons  as  inspectors  to
investigate the affairs of the company and to report thereon
in such manner as the Central Government may direct, “if, in
the   opinion    of  the     Central   Government,     there     are
circumstances suggesting-
(i)  that  the    business of the company is  being  conducted
with  intent to defraud its creditors, members or any  other
persons, or otherwise for a fraudulent or unlawful  purpose,
or in a manner oppressive of any of its members or that     the
company was formed for any fraudulent or unlawful purpose;
(ii) that persons concerned in the formation of the  company
or  the     management  of     its  affairs  have  in      connection
therewith  been     guilty     of  fraud,  misfeasance  or   other
misconduct towards the company or towards any of its member;
or
(iii)      that    the  members of the company  have  not    been
given, all the information with respect to its affairs which
they might reasonably expect, including information relating
to  the calculation of the commission payable to a  managing
or  other director, the managing agent, the secretaries     and
treasurers or the manager,. of the company.”
The  conditions for the exercise of the statutory power     are
clearly     stated in s. 237(b).  It is well to bear  in  mind,
firstly, that: v. 237(b) confers an administrative and not a
judicial  power; secondly, that the power is  discretionary;
thirdly, that the object of the investigation is to find out
whether     in fact fraud etc., have been committed by  persons
in  relation  to the company’s affairs; fourthly,  that     the
condition  for    making    the order is the  opinion;,  of     the
Central     Government that there are circumstances  suggesting
fraud  etc.,  and lastly that there is no appeal  from    such
opinion to the Court.
The law recognises certain well recognised principles within
which the discretionary power under s. 237(b) must be  exer-
cised.     There    must be a real exercise of  the     discretion.
The authority must be exercised honestly and not for corrupt
or ulterior purposes.  The authority must form the requisite
opinion honestly and after applying its mind to the relevant
materials  before  it.     In exercising    the  discretion     the
authority must have regard only to circumstances  suggesting
one  or     more of the matters specified in  sub-clauses    (i),
(ii) and (iii).     It must act reasonably and not capriciously
or   arbitrarily.   It    will  be  an  absurd   exercise      of
discretion,  if,  for example, the authority forms  the     re-
quisite opinion on the ground that the director in charge of
the  company is a member of a particular community.   Within
these narrow limits the opinion is not conclusive and can be
challenged  in    a  court of law.  Had  s.  237(b)  made     the
opinion,  conclusive,  it  might be  open  to  challenge  as
violative of Arts. 14 and 19 of’
132
the Constitution, see : Corporation of Calcutta v.  Calcutta
Tramways   Co.    Ltd.,(1)  distinguishing  Joseph   Kuruville
Veilukunnel v. The Reserve Bank of India(2).  Section 237(b)
is not violative ,of Arts. 14 and 19.
If it is established that there were no materials upon which
the authority could form the requisite opinion the court may
infer  that  the  authority did not apply its  mind  to     the
relevant  facts.  The requisite opinion is then lacking     and
the  condition precedent to the exercise of the power  under
s.  23 7 (b) is not fulfilled.    On this ground I  interfered
with  the  order  under s. 237 (b) in  Barium  Chemicals  v.
Company Law Board(3).
Let  me recall the words of s. 237(b) : “If, in the  opinion
of   the   Central  Government,     there     are   circumstances
suggesting…… The relevant matter is “the opinion of     the
Central      Government”.     The  condition     precedent  to     the
exercise  of  power under S. 237(b) is the  opinion  of     the
Government  and     not  the  existence  of  the  circumstances
suggesting  one or more of the specified matters.   To    hold
that  the factual existence of such matters is    a  condition
precedent  to the exercise of the power is to  re-write     the
section.  Section 237(b) must be interpreted in the light of
its  own  language  and subject-matter.     We  miss  its    real
import    if we begin by referring to the construction put  by
other  judges on other statutes perhaps similar but not     the
same.     The  decisions     are  useful  when  they  lay    down
principles  of    interpretation or give the  meaning  of     the
words which have become terms of art.
The  decided cases show that normally, if the opinion of  an
administrative    agency    is the condition  precedent  to     the
exercise  ,of the power, the relevant matter is the  opinion
of  the agency and -not the grounds on which the opinion  is
founded.   In  Hubli  Electricity  Company  v.    Province  of
Bombay(4) the Privy Council had occasion to construe S. 4(1)
(a) of the Indian Electricity Act (TX of 1910) which read :
“The Provincial Government may, if in its opinion the public
interest  so  requires,     revoke     a licence  in    any  of     the
following cases, namely,
(a)  where  the     licensee in the opinion of  the  Provincial
Government  makes wilful and unreasonably prolonged  default
in doing anything required of him by or under this Act.”
The Government acting under S. 4(1)(a) revoked the  licence.
The  licensee filed a suit for a declaration that the  order
was invalid.  The Government pleaded that it had formed     the
opinion as mentioned in S. 4 (1 ) (a), and contended that on
the true construction of the Act the Court was not  entitled
to go behind its
(1)  [1964] 5S.C.R.25.
(3)  [1966] ‘Supp.  S.C.R. 311, 343.
(2)  [1962] Supp. 3 S.C.R. 632.
(4)  L.R.76 I.A. 57.
133
opinion.  The appellant submitted that the opinion  referred
to in s.  4(1)    (a)  was not the subjective opinion  of     the
Government but an   opinion  subject  to  objective,  tests.
Lord Uthwatt said .-
“Their  Lordships now turn to the question  of
construction  of s. 4, sub-s.  1    (a).   Their
Lordships     are  unable to see  that  there  is
anything in the language of the sub-section or
in  the subject-matter to which it relates  on
which to found the suggestion that the opinion
of   the    Government  is    to  be    subject      to
objective tests.    In terms the relevant matter
is  the  opinion    of the    Government  not     the
grounds  on which the opinion is    based.     The
language leaves no -room for the relevance  of
a     judicial examination as to the     sufficiency
of  the grounds on which the Government  acted
in forming an opinion.  Further, the  question
on  which     the opinion of     the  Government  is
relevant    is  not whether a default  has    been
wilful and unreasonably prolonged but  whether
there  has  been a  wilful  -and    unreasonably
prolonged default.  On that point the  opinion
is  the determining matter, -and-if it is     not
for   good  cause     displaced  as    a   relevant
opinion-it is conclusive.”
The  opinion is displaced as a relevant opinion if it  could
not be formed by any sensible person on the material  before
him.   The reason is that the Court may then infer that     the
authority  either did not honestly form the opinion or    that
in  forming  it, it did not apply its mind to  the  relevant
facts.     In  Ross-Clunis  V.  Papadopoullos  &    Ors.(1)     the
commissioner of Limassol imposed a fine on the Greek Cypriot
inhabitants  in     the  area after holding  an  inquiry  under
regulation  5  of the Cyprus  Emergency     Powers     (Collective
Punishment)  Regulations,  1955     which    provided  that     “in
holding inquiries under these regulations, the    commissioner
shall satisfy himself that the inhabitants of the said    area
are given adequate opportunity of understanding the subject-
matter    of the inquiry and making representations  thereon.”
The  Privy Council upheld the commissioner’s order  and     set
aside the order, of certiorari quashing it.  With regard  to
the  contention of the commissioner that the only duty    cast
on him was to satisfy himself of those facts, that the    test
was  a subjective one and that in the absence of  bad  faith
his statement that he was so satisfied was a complete answer
to  the argument that he had failed to comply with  reg.  5.
Lord  Morton said :-”Their Lordships feel the force of    this
argument,  but    they think that if it could be    shown  there
were no grounds on which the appellant could be satisfied, a
court might infer either that he did not honestly form    that
view  or that, in forming it, he could not have applied     his
mind to the
(1)  [1958] 2 All E.R. 23.
134
relevant  facts.  In the present case, however,     there    were
ample grounds on which -the appellant could feel ‘satisfied’
of the matters mentioned in reg. 5 (2)” see -also : State of
Maharashtra v. B. K.Takkamore(1).
The other decisions cited at the bar are not helpful on     the
construction   of  s.  237(b).     In   construing   statutory
provisions  of this description, the actual words  used     and
their subject-matter are of the utmost importance.  Thus  if
the  statute  provides    that  “if  in  the  opinion  of     the
Provincial Government it is necessary or expedient to do  so
the   Provincial  Government  may,  by    order    in   writing
requisition any land for any public purpose”, the  existence
of the public purpose but not its necessity or expediency is
justiciable,  see : Province of Bombay v. K.  S.  Advani(2).
The  reason  is     that the factual existence  of     the  public
purpose     is  by     the language of  the  section    a  condition
precedent of the requisition; and now in view of Art.  31(2)
of  the Constitution, this is a     constitutional     requirement
irrespective  of  the language of the  section.      Where     the
statute      authorises  the  executive  action  “if   AB     has
reasonable  grounds to believe” the certain circumstance  or
thing,    it  means  what     it says.   AB    must  in  fact    have
reasonable grounds for believing a circumstance or a  thing,
see  : Nakkuda Ali v. M. F. De S. Jawaratne(3).     But  in  an
emergency legislation, such a phrase was construed to impose
only   the  condition  that  AB     honestly  thought  he     had
reasonable grounds for belief, see : Liversidge v. Sir    John
Anderson(4)  but such a construction need not invariably  be
given, see King Emperor v. Vimlabai(5).     In Carltona Ltd. v.
Commissioner  of Works(6) the Court held -that an  emergency
legislation  authorising  requisition of  premises,  “if  it
appears to that authority to be necessary or expedient so to
do in the interest of public safety, etc.”, the court  could
not  investigate  the  grounds    or  reasonableness  of the
decision  in  the  absence of an allegation  of     bad  faith.
These decisions on emergency legislation stand on a peculiar
footing.   ‘Me courts are not inclined to  fetter  executive
action when the country is being raided by the enemy.    They
show  that the subject-matter of the statute has a  material
bearing     on its construction.  To give another example,     the
courts    are  not  inclined  to    interfere  with     orders      of
reference  of industrial disputes, see : State of Madras  v.
C. p. Sarathy and another(7). Swadeshi Cotton Mills Co. Ltd.
v.  State of U.P. & Ors. (8) but even such orders  -are     not
immune    from judicial review, see State of Bombay v.  K.  P.
Krishnan & Ors.
(1) [1967] 2S.C.R.583,585,588.(2) [1950] S.C.R.621.
(3) [1951] A.C.66,77.    (4) [1942] A.C. 206.
(5) L.R. 73. I.A. 144.   (6) [1943] All E.R. 560.
(7) [1953] S.C.R. 334, 346-47.(8)    [1962] 1 S.C.R. 422.
(9)  [1961] 1 S.C.R. 227.
135
Let  us     now  turn to the facts of the    present     case.     The
Central     Government passed the impugned order under  S.     237
(b) on April 11, 1963.    The order recited
“Whereas the Central Government is of the opinion that there
are  circumstances  suggesting that the business  of  Rohtas
Industries Limited,, a company having its registered  office
at Dalmianagar, Bihar, (hereinafter referred to as the    said
company)  is  being  conducted with intent  to    defraud     its
creditors,   members  or  other     persons  and  the   persons
concerned   in    the  management     of  its  affairs  have      in
connection  therewith been guilty of fraud, misfeasance,  or
other  misconduct towards the said company or its  members.”
The  order  then  stated  that in  exercise  of     the  powers
conferred  by  s. 237 (b) sub-clauses (i) and  (ii)  of     the
Companies Act, 1956 the Central Government appointed Shri S.
Prakash     Chopra as inspector to investigate the     affairs  of
the said company for the period April 1, 1958 up to date and
should he consider it     necessary also for the period prior
to April 1, 1958.
Learned     Attorney-General conceded that the affidavit of  R.
C.  Dutt  affirmed  on    August    25,  1965  and    the  further
affidavit of   Sisir Kumar Datta on October 4, 1968 pursuant
to the order of this Court dated September 9, 1968 disclosed
all  the materials which were before the Central  Government
when  it passed the order dated April 11, 1963.     He  further
conceded  that the only circumstance suggesting fraud  etc.,
in relation to the company’s affairs after April 1, 1958 was
the  transaction  relating  to 3,000  preference  shares  in
Albion    Plywoods Ltd., on May 6, 1960 and that but for    this
transaction  the  Government  would  not  have    passed     the
impugned  order.  The materials before the  Government    with
regard to the transaction were as follows : Albion  Plywoods
Ltd., had issued 50,000 ordinary shares of Rs. 10 and  5,000
5-1/2%    cumulative redeemable preference shares of Rs.    100.
2,000 preference shares were held by New Central Jute  Mills
Company     Ltd.,    and  2,000 preference shares  were  held  by
Rohtas Industries Ltd.    New Central Jute Mills Co. Ltd.     and
the Rohtas Industries Ltd., were both controlled by the Sahu
Jains  or  Sri    S.  P. Jain.   The  preference    shares    were
redeemable at the option of the Albion Plywoods Ltd., at any
time  after  10     years    from the  date    of  their  issue  on
September  7,  1957.  In April 1960 New Central     Jute  Mills
Co.,  Ltd., sold 2,000 preference shares held by it to    M/s.
Bagla  &  Co., and M/s.     Poddar Sons at Rs.  100  per  share
against     cash  payment.     On May 6,  1950  Rohtas  Industries
Ltd., sold 3,000 preference shares held by it to M/s.  Bagla
&  Co., at Rs. 100 per share.  On the dates when  the  sales
were  effected the management of New Central Jute Mills     Co.
Ltd.,  and Rohtas Industries Ltd., knew that the  preference
shares would be converted into ordinary shares.     As a matter
of fact Albion Plywoods Ltd., by a special resolution passed
on May 20, 1960 converted 5,000
136
preference shares into 50,000 ordinary shares and M/s.    Sahu
Jains  were  appointed as its managing agents.     The  market
price  of an ordinary share as shown in the  Indian  Finance
was  Rs. 14 on May 13, 1960, Rs. 15-44 on May 20, 1960,     Rs.
17  on May 27, 1960, Rs. 17 on June 10, 1960 and Rs.  14  on
June 17, 1960.    The charge is that the management of  Rohtas
Industries  Ltd.,  sold the preference shares  at  an  under
value  with  a view to benefit the  managing  agents,  their
friends     and brokers knowing fully well that  on  conversion
into  ordinary shares they would fetch a much higher  price.
The  charge was originally made with regard to the  sale  of
2,000  preference shares held by New Central Jute Mills     Co.
Ltd., in a letter dated January 27, 1961 addressed by a com-
plainant  to  the  Secretary to     the  Government  of  India,
department  of    company law administration.   In  course  of
investigation  into  this  charge,  the     regional  director,
company law administration, Calcutta, discovered that Rohtas
Industries  Ltd., also had sold 3,000 preference  shares  to
M/s.  Bagla & Co., on May 6, 1960.  The annual return  filed
by Albion Plywoods Ltd., on May 30, 1960 showed that  32,000
ordinary shares in the company were then held by the members
of the Bagla family.  These materials are to be found in the
complaint dated January 27, 1961 with regard to the sale  of
2,000 preference shares by New Central Jute Mills Co.  Ltd.,
and  the correspondence passed between the Secretary to     the
Government  of    India, ministry of  commerce  and  industry,
department of company law administration, New Delhi and     the
regional director, company law administration, Calcutta.  On
the  subject of the sale of preference shares there  was  no
other  material     before the Government when  it     passed     the
order dated April 11, 1963.
Several     things     are to be noticed in this  connection.      No
complaint with regard to the impropriety of the sale of     the
preference shares held by Rohtas Industries Ltd. was made to
the  Central Government by any of its creditors or  members.
There    was  no     material  before  the    Central      Government
suggesting  that  M/s.     Bagla & Co.,  held  the  preference
shares    as benamidars of M/s.  Sahu Jains or their  friends.
On May 30, 1960 M/s.  Bagla & Co., continued to hold  32,000
ordinary shares in Albion Plywoods Ltd. it is not  suggested
that  the market price of preference shares on May  6,    1960
was  more  than Rs. 100.  The market price of  the  ordinary
shares    fluctuated between Rs. 14 and Rs. 17 between May  13
and  June 17, 1960.  But there was no material showing    that
the  huge  block  of  50,000  ordinary    shares    issuable  on
conversion  of 5,000 preference shares could be sold in     the
market for more than Rs. 10 per share.    No attempt was    made
to  find out the market price of ordinary shares on  May  6,
1960.  It now transpires that on that date the price was Rs.
11.   The charge that the sale of the Preference shares     was
fraudulent or improper was not corn-
137
municated to the Rohtas Industries Ltd., nor were they asked
to give their explanation on the subject.
I think it is a border line case.  The Court has no power to
review the facts as an appellate body nor can it  substitute
its  opinion  for that of the Government.  But    the  curious
feature of the case is that on reading the affidavits we are
left with the impression that the Government did not rely on
the  transaction  relating to the sale of  3,000  preference
shares    of  Albion Plywoods Ltd., as suggesting     fraud.      It
appears that the Government passed an order under S.  237(b)
appointing  an inspector to investigate the affairs  of     New
Central Jute Mills Co. Ltd. but it seems that the Government
did  not rely on the sale of 2,000 preference shares by     the
management  of    this  company as  a  relevant  material     for
passing the order, see the report of New Central Jute  Mills
v.  Finance Ministry(1) at pages 160-1.     On the whole, I  am
inclined  to  think that there was no  material     before     the
Government  on    which it could form the opinion     that  there
were  circumstances suggesting fraud etc., as  mentioned  in
the  impugned order dated April 11, 1963. 1 -am,  therefore,
constrained  to     hold  that it formed  the  opinion  without
applying  its mind to the materials before it.    The  opinion
so formed is in excess of its powers and cannot support     the
order under S. 237(b).
In the result, I agree to the order proposed by Hegde, J.
V.P.S.                  Appeals allowed..
(1) A.I.R. 1966 Cal. 151.
7 Sup C1169-10
138

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