Deodatt Purshottam Patel v/s Alembic Glass Industries Ltd. 

Estimated Reading Time: 10 minutes

Introduction

Investigation, in common parlance, means “a formal or systematic examination or research.” Under the Companies Act, 2013 section 210, 212, 213 and 216 deals with Investigation into the affairs of the company. Section 213 provides for “Investigation into the affairs of the company in other cases.” According to this provision, National Company Law Tribunal can order investigation into the affairs of the company in specified cases. However, such order of investigation can be passed by the tribunal, only after providing reasonable opportunity of being heard to the concerned parties. Clause (a) of section 213 states that the National Company Law Tribunal can pass the order of investigation in a company having a share capital, either when the application is submitted by hundred or more members or by the members holding one- tenth of the total voting power or more. In case if the company does not have a share capital, then the application must be made by at least one-fifth of the persons registered in the company’s register. 

However, appropriate evidence and records must be presented to the tribunal in support of the application, demonstrating why the investigation is being requested. An application would only be entertained if these provisions are complied with. However, these are not just the only requisites to file an application before the tribunal. An individual can also file an application and if the tribunal has the reason to believe that the business is involved in fraudulent activities or has an intent to defraud its creditors and members or if the people involved in the formation of the company are guilty of fraud or misconduct towards the company then also the tribunal can pass an order of investigation. 

Apart from this, if the company is not transparent with its members regarding the matter of affairs of the company then also the tribunal can pass an order of investigation. Section 237 of the Companies Act, 1956 is similar to this provision. Clause (a)(ii) of section 237 of the old act provides that investigation into the affairs of the company can be initiated if the court passes an order that investigation proceedings shall be undertaken by an inspector appointed by the central Government. It is significant to mention that when it comes to investigating the company’s affairs, the statutes; both old and new, have vested more power in the courts as compared to the Central Government.

Facts Of The Case

Alembic Glass Industries Ltd. a company based in Baroda and engaged in the business of manufacturing of glass ware is the respondent no. 1 in this matter. Petitioner no. 1 is a shareholder in the respondent company. The petitioner filed this suit before the Hon’ble High Court of Gujarat alleging that the company is involved in fraudulent activities with an intent to defraud its members as well as creditors. It was also alleged that the business of the aforesaid company is also oppressive to its members. 

The following the specific complaints made by the petitioner:

  1. The management has purchased and sold capital assets in excess of the permitted limits and without the consent of the Board of Directors. 
  2. blatant breach of section 372 by purchasing the shares of Alembic Chemical Works Company Ltd. and M/s. Dharak Ltd.
  3. purchases made at higher prices and in the interest of a person who is a partner at a company namely, Nishechi Services.

In light of this, the petitioner filed a complaint with the Central Government, requesting to initiate proceedings under section 237 of the companies act, 1956. However, the Central government has taken no action and has provided no information to the petitioner in this regard. Therefore, the petitioner filed an application under section 237(a)(ii) before the Hon’ble court.

Issues Involved In The Case

The following are the issues raised in this present case:

  1. Whether the court has the jurisdiction to entertain an application under section 237(a)(ii) of the Companies act, 1956?
  2. Whether the powers conferred upon the Central Government under section 237(a)(ii) can only be exercised after the Central Government has declined to exercise powers under section 237(b)?
  3. Whether the court can only order investigation proceedings while adjudicating upon a matter and not by an independent petition to seek investigation?

Contentions Of The Parties

The learned Advocate General while dealing with the first issue contended that the petition filed to seek investigation under section 237(a)(ii) of the Companies act, 1956 has no merit as the Hon’ble court does not have jurisdiction to appoint an inspector to carry out investigation into the affairs of the company. The power to appoint an inspector is only vested in the Central Government and not in any court. Section 235 as well as section 237 of the Companies Act, 1956 gives the power to the Central Government to order investigation into the affairs of the company either suo moto or on receipt of complaints by the members of the company or by the registrar. 

However, such power to direct investigation can only be exercised if the Central Government has a reason to believe that the complaints have some credibility. Section 237(a)(ii) of the Companies act requires the Central Government to appoint an inspector if the court orders so. The court cannot pass an order to direct the Central Government to appoint an inspector to initiate the investigation proceedings. The power to appoint an inspector is only either with the Registrar of Companies or with the Central Government on the basis of the information received by them. 

The learned counsel argued that Section 237 must be read subject to section 235 and section 237(b) where it’s mentioned that a complaint would only be entertained by the Central Government if it’s made by a considerable number of people of if its made by a single person then it is important that the complainant draws the attention of the Central Government towards the fraudulent activities carried out by the company. Considering that, it is difficult to comprehend that the legislature will confer such wide and unrestricted power to the courts under section 237(a)(ii). 

The counsel also pointed out that based on other provisions of the act, it is clear that any action against a company is taken by a group of people and that if a single person has the power to take any action, then it is specifically mentioned in that provision. In that case there is no such specification under this provision. Furthermore, if the court began to hear petitions brought by individuals against the companies then a floodgates of litigation would be opened.

Furthermore, the Advocate General contended that even if the court has the jurisdiction to pass an order for investigation then also the court cannot pass an order for the same at such an early stage. It is crucial to note that the petitioner had first approached the Central Government through his complaints alleging that the company is involved in fraudulent activities. The petitioner made multiple submissions to the central Government either through letter or through affidavits, requesting them to take actions under section 237(b). But no information was received by the petitioner in furtherance of those complaints.

The submission of the respondent-counsel was that before filing an application under section 237(a)(ii) before a court it is incumbent upon a party to approach the Central Government and if the central government refuses to acknowledge the complaint then only the complainant can approach the court. This would mean that making a complaint before the central government is a requirement before filing any petition before the court under this provision.

Another contention put forward by the counsel was that the court can order investigation under section 237(a)(ii) only while scrutinizing the company’s affairs in some other proceeding and a separate petition seeking investigation shall not be entertained by the courts. So if the court adjudicating upon a matter and in order to grant relief to the party it is important to investigate into the company’s affairs then the court can simultaneously order for an investigation proceeding.

Summary Of The Judgment

The Hon’ble court observed that the phrasing of section 237(a)(ii) is simple and straightforward and there is no reason to interpret it in a way that restricts or limits this court’s ability to entertain a petition for the central government to appoint an inspector to investigate the company’s affairs. If an order to appoint an inspector is passed by the court then the central government is obligated to comply with such an order and appoint an inspector. 

On scrutinizing section 237, the Hon’ble court observed that the power vested in the court to entertain a petition under section 2379(a)(ii) is very wide as compared to the Central Government’s power to appoint an inspector under section 237(b) as it is limited by subjective compliance with one or more of the clauses provided under the same provision. The statute, however, does not impose any such restrictions on the court and the court is at the liberty to order investigation by applying its own wisdom. The court was of the view that when a petition is being heard in a court then there is a proper framework which is followed. There is a judicious investigation carried out by a judicially trained person who after considering all the aspects of the case passes an order. If an individual approaches the court under section 237(a)(ii), then the court will pass an order only after examining the proof and after satisfying the judicial conscience. The court held that section 237(a)(ii) is not controlled by any other provision and therefore, it will not be construed on the basis of section 235 and 237(b).

The Hon’ble High Court of Gujarat while dealing with the second issue, was of the view that the construction of section 237(a)(ii) made by the learned counsel representing the respondent is pointless and not required. None of the words in the provision necessitate such an interpretation. If approaching the central Government would become a condition precedent before invoking the jurisdiction of the court to order investigation then it will limit the powers of the court. The judiciary is an independent organ whose power cannot be limited by any other organ of the government. 

Furthermore, the act does not provide for such an interpretation. The court has the power to refuse to exercise its jurisdiction under section 237(a)(ii) before the dispute is resolved by the central Government. However, no constraints on the court’s power can be imposed by stating that one cannot approach the court before approaching the Central Government. The court also placed reliance on the English Companies Act, 1948 where it is provided that “An application for an order is made by originating motion. Such an order may further be made by the court of its own motion in any proceeding before it.” Apart from this, Gower, in his Principles of Modern Company Law, has observed that an application made to a court for an order is exceedingly uncommon as approaching the board is much easier and cheaper. Similarly, an individual would be hesitant to approach the court at first considering the time and money it would involve and therefore would prefer to approach the Central Government. But this does not mean, one cannot approach the court.

In regard with the third issue, the court was of the view that no such interpretation is required of the provision and pendency of a proceeding in a court is not a sine qua non to order investigation under section 237(a)(ii). Although the court has the power to order investigation into the affairs of the company while adjudicating in another matter however, this is not the only condition to order an investigation and the court has the power to entertain a separate petition seeking investigation. The court also placed reliance on Rule 11(9) of the Companies (court) rules, 1959 in which it is provided that a petition can be filed under section 237 and therefore, held that the court has the power to entertain this petition.

Analysis Of The Judgment

Section 237(a)(ii) of the Companies Act, 1956 states that the court has the power to order an investigation into the affairs of the company. This is the literal construction of the above said provision. Only when the words or phrases of any provision in a statute are unclear or ambiguous are they construed. However, if the words can be taken literally, there is no need to go to great lengths to comprehend the meaning of the law. The Hon’ble High Court after placing reliance on the English Companies Act was of the view that the court has the jurisdiction and power to order investigation. In their opinion, the court had rightly held that section 237(a)(ii) must not be read subject to other provisions of investigation. The provisions of investigation under the companies act are all interconnected yet independent. 

All of these provisions are stating certain conditions which must be met to begin an investigation but it is not necessary that the conditions of one provision will be applicable on the other provision as well or will put a limitation on them. Judiciary is an independent organ of the government. Its role is to safeguard the rights of the people and settle disputes by application of judicial mind. A court passes an order only after scrutinizing all the facts, evidence and contentions put forward by the learned counsel. Bearing that in mind, an order into the affairs of the company would only be ordered if the court believes that it is actually required. The righteousness of the judiciary must not be doubted. 

Conclusion

According to section 237(a)(ii) of the Companies Act, 1956, the court has the power to entertain a petition even if it is filed by an individual. Section 213 of the Companies act, 2013 is similar to section 237 of the Companies act, 1956. In the new act, it is specifically mentioned that the NCLT has the power to entertain a petition filed by a person for investigation into the affairs of the company if they have a reason to believe that the complaint has certain credibility. The court by exercising its powers can direct the Central Government to appoint an inspector so that the proceedings of investigation can be initiated and the Central Government has an obligation to comply with the court’s order. 

Therefore, it can be inferred that the court has been given wider powers by the legislature as compared to the Central Government when it comes to the investigation of the company’s affairs. The court also has the power of judicial review, which allows it to maintain checks and balances by reviewing the actions of both the legislature and the executive branch. The courts are also vested with the power to interpret the statute. They must, however, be construed only if the words or phrases of a provision are ambiguous. It is critical to maintain the significance of the legislature as well and to avoid the judiciary’s arbitrary use of power.

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