ROHTAS INDUSTRIES LTD. versus S. D. AGARWAL & ANR.

Citation: [1969] 3 S.C.R. 108 · Decided: 16-12-1968 · Supreme Court of India · Bench: S.M. SIKRI · Disposal: Appeal(s) allowed

Cited by 12 judgment(s) · cites 4 · see the full citation network in Lexace

Judgment (excerpt)

ROHTAS INDUSl'RIES LTD. 
v. 
S. D. AGARWAL & ANR. 
December 16, 1968 
[S. M. SIKRI, R. S. BACHAWAT AND K. S. IIEGDE, JJ.) 
Indian Companies Act (1 of 1956), s. 237 (b)(i) and (11)-Circum-
stances suggesting fraud-Existence of-II condition precedent to action 
under section. 
· 
A 
B 
On May 20, 1960, Albion Plywoods Ltd. resolved at a general meeting 
to convert its preference shares into ordinary shares. Ml s. Sahu Joins 
were its managing agents. Some time before, in April 1960, New Central' 
Jute Mills Co. Ltd. had sold the preference shares of Albion Pl~s C 
which it was holding. 
One S. P. Jain, against whom proeeedmgs in 
criminal courts were pendin~ for acts of misfeasance and malfeasance 
in relation to other comparues, 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, Gove.rnment 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 effect-
ed at an undervalue so that, on conversion into ordinary shares they 
D 
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-com,Pany had also ~old 3000 preference 
sha'res of Albion Plywoods which 1t was holding, on May 6, 1960. The 
appeJlant-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 
E 
the affairs of the appellant-company and to report thereon to the Central 
Government, on the basis that the sale of preference sha'res was a fraudu-
lent ·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 challengin$ the order. The High Court 
dismissed it on the ground that the opmion of the Central Government 
was not open to judicial review and that the declaration of the Govern-
F 
ment 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 c .. re 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 oppres-
sive of any of its members, or that the company was formed 
for a 
G 
fraudulent or unlawful purpose, or that persons concerned in its formation 
or management have, in connection therewith, been guilty of fraud, mis-
feasance or other misconduct towards the company o'r its members; that 
is, though the opinion of ~~e Government is subjectiv~, the existen~e. 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 existe~ce of such circumstances in the order, but could detei'mioe, 
whether the circumstances did in fact exist, and whether the Central 
H 
Government took extraneous matters into consideration. 
HELD (per Sikri an& Hegde, JJ.) : Sections 235 to 237 are allied 
sections and form a scheme for investigation into the affaiiil of a company. 
A 
B 
c 
D 
F 
G 
H 
ROHTAS INDUSTRIES V. S. D. AGARWAL 
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 
tak_es 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 pros-
pects 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 reason-
able restriction if circumstances suggesting

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