- (1.) THIS appeal raises several important questions concerning the provisions of the new Companies Act of 1956. The facts which are necessary to state are very few. The appellant, who is also the petitioner, is the managing agent of a limited company called the Harinagar Sugar Mills Ltd. On 15-11-1954 the Registrar of Companies called for an explanation from the Harinagar Sugar Mills Ltd. , and the Registrar stated in his letter that it had been represented to him under S. 137 (6) of the Indian Companies Act that the business of the company was carried on in fraud and he had therefore to call upon the company to furnish the information which he required which was set out in the latter part of the letter. On 15-4-1955 the Registrar made a report to the Central Government. This report was made under S. 137 (5) of the old Companies Act and the report was that the affairs of the company were carried out in fraud of contri-butories and he was of the opinion that the affairs of the company disclosed an unsatisfactory state of affairs. He pointed out that the appellant as the managing agent of the company was also the promoter of the company. He stated in his report that under a fictitious name of Bansilal Uchant Account the company was advancing money to the several farms owned by the appellant but ostensibly purchased from the company's funds. He also recorded that between the years ending September 1942 and 1951 about Rs. 19,200/- were paid for Harpur Farm and Rs. 39,300/- were paid for Bhawanipur Farm, which showed that Uchant Account was mainly operated for purchasing such lands out of the funds of the company but for and on behalf of the appellant. The Registrar also further stated in this report that the managing agents were interested in Harinagar Cane Farm which is the principal property of the appellant, and there was no doubt that the managing agents were utilising the property of the company for their personal gain. On this report the Central Government passed an order on 1-11-1955 appointing the first respondent as an Inspector to investigate into the affairs of the company under S. 138 (iv ). In the operative part of this order it is stated that the Central Government, in exercise of the powers conferred by sub-s. (iv) of S. 138 of the said Act, is hereby pleased to appoint Shri Maneck P. Mistry (i. e. the first respondent), F. S. A. A. , F. C. A. , Chartered Accountant, Bombay, as an Inspector to investigate into the affairs of the company from the date of incorporation and point out all irregularities and contraventions in respect of the provisions of the Indian Companies Act, 1913, or any other law and report in the manner indicated in a separate communication sent to him. This separate communication dealt with the mode of inquiry and the memorandum states: "as provided by S. 141a if on an examination of the report the Central Government find that any person has been guilty of any offence in relation to the company for which he is criminally liable, Government will refer the matter to the Advocate-General or the Public Prosecutor. " Then comes a direction to the Inspectors that they should bear in mind that for a successful prosecution the evidence in support of a charge must be clear, tangible and cogent. Inspectors were further asked that they should specify in their reports with reference to the evidence, either oral or documentary or both, collected during investigations on the following amongst other matters; and the material matters to which reference might be made are: What is the offence committed, quoting as far as possible the section contravened; the precise evidence, oral, documentary or both, which implicates each of the named accused and goes to prove the charge; and in case of misappropriation, the amount misappropriated. There is a further direction to the Inspectors that they should make proper use of their rights available to them under S. 140 of the Act including the right to examine a person on oath. Questions should be so put to persons examined on oath as to bring out their admissions with reference to facts. Now, this memorandum was annexed to the order because this memorandum contains directions issued to all Inspectors appointed under the provisions of the Compaines Act and a copy of it was sent to the first respondent for his guidance In the Investigation which he was called upon to undertake pursuant to this order. Pursuant to the powers conferred upon him under this order, the first respondent wrote to the appellant a letter intimating to him that under sub-s. (2) of S. 140 of the Indian Companies Act he will examine him on oath in relation to the business of the Company. On 26-7-1956 the Central Government accorded its approval under S. 239 (2) of the new Companies Act (I of 1956) to the first respondent exercising the powers of investigation into and reporting on the affairs of the appellant including his personal books and accounts and Messrs. Narainlal Bansilal, the managing agents of Harinagar Sugar Mills Ltd. It may be stated that the appellant is the proprietor of the firm of Narainlal Bansilal. After approval was accorded, the first respondent served upon the appellant four notices dated 9-5-1957, 16-5-1957, 29-5-1957 and 29-6-,1957. The four notices are substantially identical and it is sufficient to refer to the first one of them. The notice of 9-5-1957 states: "now, therefore by virtue of the provisions contained in S. 240 of the Companies Act, 1956, I hereby call upon you to attend my office on ,14-5-1957 at 3 P. M. at the offices of Messrs. Kalyaniwalla and Mistry, 32, Apollo Street, Fort, Bombay, for the purpose of being examined on oath in relation to the affairs of the said Company and I also hereby call upon you to produce to me all the books of account and papers relating to the said Company as mentioned below. Please take further notice that in default of compliance with the requisition aforesaid necessary legal steps will be taken without further reference to you. " Then comes a list of books and papers to be produced and among them are the personal books of account of the appellant for the year 1933 upto date, books of account of Messrs. Narayanlal Bansi-lal, the managing agents of Harinagar Sugar Mills Ltd. , for the years 1933 upto date, and books of account of Harinagar Cane Farm from 1934 upto date. The petition which the appellant filed and out of which this appeal arises, challenged these four notices as being bad in law, and the challenge was based on three grounds which were urged before the Court below and which have been very effectively and strongly urged by Mr. Manecksha before us. The three grounds which were urged were that the first respondent having been appointed under the old Act had no jurisdiction to exercise powers under the relevant provisions of the new Act. The second contention was that certain portions of S. 240 of the Companies Act, to which we will make reference at the proper time, offend against the provisions of Art. 20 (3) of the Constitution, and it was also urged that certain portions of Ss. 239 and 240 offend against the provisions of Art. 14 of the Constitution. The learned Judge rejected all the three contentions raised by the appellant and dismissed the petition. Hence this appeal.
(2.) TURNING to the first point which deals with the powers of the appellant, it is necessary in the first place to look at the relevant provisions of the old Act of 1913 and the new Act of 1956. Under the old Act, under S. 137 power was conferred upon the Registrar to call for information or explanation from a company in respect of the affairs of the company, and sub-s. (5) of that section provided that on the receipt of the necessary information if it disclosed an unsatisfactory state of affairs as far as the company was concerned, it was made incumbent upon the Registrar to report the. circumstances of the case to the Central Government. Then S. 138 conferred upon the Central Government the power to appoint one or more competent inspectors to investigate the affairs of any company, and the case with which we are concerned is sub-clause (iv)- " (iv) in the case of any company, on a report by the Registrar under S. 137 (5)". It was under this section that the Central Government appointed an Inspector on a report made by the Registrar under S. 137 (5 ). Section 140' deals with inspection of books and examination of. officers and it provides:" (1) It shall be the duty of all persons who are or have been officers of the company to produce to the inspectors all books and documents in their custody or power relating to the company. (2) An inspector may examine on oath any such person in relation to its business, and may administer an oath accordingly. " And it is made penal by sub-s. (3) to refuse to produce any book or to answer any question put by the Inspector relating to the affairs of the company. It will be noticed that S. 140 confers rather wide powers upon the Inspector, but the power was confined to investigation relating to the affairs of the-company, and the power to administer oath and obtain documents was also confined to matters relating to the business of the company under investigation. There was no power in the Inspector to investigate into the affairs of any other body or any other person. Section 141 dealt with results of the examination held under S. 140 and sub-s. (1) made it incumbent upon the Inspector to report his opinion to the Central Government. Section 141a -. dealt with the institution of prosecutions and these prosecutions were to be launched by reason of the facts disclosed in the report of the Inspector. But before a prosecution could be launched, the matter had to be referred by the Central Government to the Advocate General or the Public Prosecutor. But. it was left to the subjective determination of the Central Government whether to refer the matter to the Advocate General or the Public Prosecutor because sub-s. (1) expressly provided "if from any report made under S. 138 it appears to the Central Government that any person has been guilty of any offence in relation to the company for which he is criminally liable. . . . . . . Sub-section (2) dealt with the case where the matter was referred to the Advocate General or the Public Prosecutor, and if either of them came to the' conclusion that the case was one in which a prosecution ought to be instituted, he had to institute the proceedings and it was made obligatory upon all officers and agents of the company, past and' present, to give him all assistance in connection with the prosecution which they were reasonably able to give. But it is material to note that the accused in the proceedings was exempted from this duty; in other words, it was not obligatory upon him to render any assistance to the law officer of the State. Section 142 gave the power to the company to appoint Inspectors in contradistinction to the power conferred upon the Central Government under S. 138. Under this section the company could appoint an Inspector by a special resolution, and the report was to be made to the company instead of to the Central Government. Section 143 provided that the report of the Inspector shall be admissible in any legal proceeding as evidence of the opinion of the Inspector in relation to any matters contained in the report. Therefore, this was the scheme under the old Act with regard to investigation into the affairs of a company which the Registrar found was not managed as it should be managed, and it will be noticed that the scope? and purpose of the investigation was to investigate the affairs of the company and all powers which were conferred upon the Inspector were germane to the main purpose of the investigation which was to find out how the affairs of the company were being managed.
(3.) TURNING to the new Act of 1956, certain important alterations were made in the provisions with regard to inspection and we will now proceed to point out what the main alterations were. Section 234 substantially corresponded to S. 137. Section 235 also substantially corresponded to S. 138. Then we have S. 237 which confers power upon the Central Government to appoint Inspectors in cases other than covered by S. 235 and without prejudice to the powers of the Central Government under that section, and it is made incumbent upon the Government to appoint Inspectors to investigate the affairs of the company 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. So that the power that was given under the old Act to the company under S. 142 to appoint Inspectors who were to report to the company itself was taken away and instead of that S. 237 made it obligatory upon the Government to appoint inspectors if the company itself by special resolution declared that the affairs of the company should be investigated, and an important power was conferred upon the Court that the Court could also direct the Government to appoint an Inspector or Inspectors. Then we come to S. 239 and this provision considerably enlarges the power of the Inspector with regard to inspection. It will be remembered that S. 140 confined the power of the Inspector with regard to investigation within certain definite bounds. Section 239 extended the power of the Inspector not only to investigate into the affairs of the company concerned, but also into the affairs of related companies or of managing agents or associates as defined by the Companies Act. It is under this section that the first respondent is purporting, under the notices issued and which are impugned, to call upon the appellant to submit to an investigation of his affairs both as managing agents and also of his individual business. But while conferring this very extensive power upon the Inspector, the Legislature was careful to provide that this examination was to be held if an Inspector appointed under S. 235' or S. 237 to investigate the affairs of the company thinks it necessary for the purposes of this investigation. So that it was not as if the Inspector was at large and ho could call upon a managing agent to disclose his private books of account or the books of account of his private business or to indulge in a roving inquiry. The Inspector had to be satisfied that such inspection of books or such inquiry was necessary for the main purpose for which he was appointed an Inspector and for which the inquiry was ordered and that was to investigate into the affairs of the company. In other words, what the Inspector had constantly to keep in mind was that his primary function and duty was to investigate the affairs of the company. It is in order to discharge that primary function that he was empowered to go further on what he could do under S. 140 and to examine the managing agent and also examine his personal books of account and the books of account of his own personal business. Sub-section (2) of S. 239 provides: "in the case of any body corporate or person referred to in Cls. (b) (ii), (b) (iii), (c) or (d) of sub-s. (1), the inspector shall not exercise his power of investigating into and reporting on, its or his affairs without first having obtained the prior approval of the Central Government thereto. " As will be remembered, the first respondent only sought to exercise his power under S. 239 after he had obtained the prior approval of the Central Government. Therefore, by this sub-section the Central Government kept control over the Inspector and would permit him to exercise his extensive powers under S. 239 with regard to investigation of persons and bodies other than the company concerned, provided the Central Government gave its approval to such investigation. Then S. 240 casts an obligation upon all officers and agents of the company and all companies and persons referred: to in S. 239, whose affairs are being investigated through the approval of Government, to produce all documents and evidence in their possession. Subsection (2) of that section empowers the Inspector to examine any person on oath, and sub-s. (3) provides that if such a person refuses to produce before an Inspector any relevant book or paper or answer any question put to him by the Inspector, he may certify the refusal to a competent Court and the Court may punish such person for contempt. Then sub-s. (4) empowers the Inspector to apply to the Court for the purposes of investigation to examine on oath a person whom he has no power to examine pursuant to the power conferred upon him, and the Court may, if it thinks fit, order such a person to attend and be examined on oath. This examination is to be held by the Court itself There is an obligation upon the person examined to answer all questions. Then comes the important provision in sub-s. (5) that the notes of examination, whether of evidence taken by the Inspector under sub-s. (2) of Sec. 240 or taken by the Court under sub-s. (4), shall be taken down in writing and shall be read over to or by, and signed by, the person examined, and may thereafter be used in evidence against him. Section 241 deals with the Inspector's report which has got to be forwarded to the Central Government, and S. 242 deals with prosecution which substantially is the same as S. 141a but it emphasises the discretion conferred upon the Central Government in regard to launching of prosecution because it says that the Central Government may, after taking such legal advice as it thinks fit, prosecute such person for the offence. .;