IMPORTANT POINT
Under an excuse that the Company Law Board has not yet made an order, a shareholder cannot be allowed to by pass the express provisions of the Companies Act and move the High Court under Article 226 of the Constitution for prevention of oppression and mismanagement.

Headnote:Companies Act, 1956-Sections 235, 234-Statutory remedies-Allegations regarding mismanagement of affairs of company and oppression of minority shareholders-A shareholder has very effective remedies under the Act-A shareholder not allowed to by pass express provisions of the Act and move High Court under Art. 226-Nature of power conferred on Central Government u/s 235 and 237(b)-Impugned judgment of Division Bench directing an investigation into affairs of company, bypassing provisions of Act-Not sustainable-W.A. No. 1409 of 1996 reversed.
       Held : Under an excuse that the Company Law Board has not yet made an order, a shareholder cannot be allowed to by pass the express provisions of the Companies Act and move the High Court under Article 226. A shareholder has very effective remedies under the Companies Act for prevention of oppression and mismanagement. When such remedies are available, the High Court should not readily entertain a petition under Article 226. (Para 11)
       The writ petition under Article 226 prays for an investigation into the affairs of the first appellant-company, and for action against appellants 2 and 3. The interim prayer for an administrator of the company also clearly shows that the main grievance of the first respondent in the writ petition relates to the management of the affairs of the first appellant-company. (Para 6)
       The Companies Act, 1956 provides for dealing with such grievances against a company and its Board of Directors. Under Section 235 of the Companies Act, 1956 the Central Government may, where a report has been made by the Registrar under Section 234(6) or (7), 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. Whereupon the Central Government could order an investigation under Section 235. The Central Government, therefore, will not readily order an investigation into the affairs of the company unless the Registrar makes a report as set out in Section 235(1) read with Section 234(6) and (7). (Para 7)
       The scheme of these sections makes it clear that unless proper grounds exist for investigation of the affairs of a company, such investigation will not be lightly undertaken. An investigation may seriously damage a company and should not be ordered without proper material gathered in the manner provided in the Companies Act. The Power of investigation has been conferred on the Central Government on the faith that it will be exercised in a reasonable manner. (Para 9)
       Further held : The company is only a deemed public limited company. Its shareholding is very closely held. The only other factor referred to in the writ petition to invoke the doctrine of so called public interest, is the fact that the company had borrowed moneys from public institutions. This is no ground for not availing of the statutory remedies provided under the Companies Act before the appropriate statutory forums which are designed for this very purpose. We are distressed to find that the well-reasoned judgment of the Single Judge was interfered with in a casual manner. The impugned judgment rests on fragile foundations and reads more like an ipse dixit. (Para 13)

JUDGMENT

Mrs. Sujata V. Manohar, J.-Leave granted.

2. The first appellant company was established in 1944 as a private limited company under the Companies Act, 1913. It continued as a private limited company under the Company under the Companies Act 1956. However, with effect from 1.2.1975, by virtue of Section 43-A of the Companies Act, 1956, it became a public limited company in view of the fact that the annual turn-over of the company was above the prescribed limit. The first appellant company, however, continues to be a closely held company consisting of only 61 shareholders including 11 employees and ex-employees. The second appellant is the Chairman and Managing Director of the first appellant company. The third appellant is the Joint Managing Director of the first appellant company. The main object of the company is to carry on the business of parcel lorry service, manufacture of automobile components and dealership of Telco.

3. It is the case of the appellants that there were disputes between the Managing Director i.e. second appellant, and his son-in-law, Srihari Rao, who was a former Director of the first appellant company and a former Member of Parliament. The disputes started some time in 1993. In 1994, (according to the appellants, at the instigation of Srihari Rao) eight shareholders of the company filed before the Company Law Board, Principal Bench, New Delhi, a company petition bearing C.P. No. 7 of 1994 under Section 397 and 398 of the Companies Act, 1956, on the ground of oppression of minority shareholders and mismanagement of the affairs of the company by the second and third appellants. In the said petition an injunction was sought to restrain the first appellant company from proceeding with the Rights Issue of its shares. After hearing both the parties, however, the Company Law Board declined to grant any interim order to this effect. The Company Law Board directed the company to file an affidavit with regard to the Rights Issue and to follow the procedure which it had followed earlier for the Rights Issue.

4. Thereafter, Srihari Rao and some others filed before the Company Law Board another Company Petition No. 15 of 1994 under Sections 397 and 398 of the Companies Act, 1956 on the ground of oppression of minority shareholders and mismanagement of the affairs of the company by the second and third appellants. This petition was filed on 7th April, 1994. An interim relief was sought from the Company Law Board for supercession of the Board of Directors of the first appellant-company and for re-constitution of Board of Directors. An interim injunction was also sought against appellants 2 and 3 to restrain them from functioning as Managing Director and Joint Managing Director of the first appellant-company. The company petition was listed for hearing on 20th March, 1995. It was adjourned at the request of the petitioners therein and thereafter from time to time. The petitioners before the Company Law Board filed an application to receive evidence by affidavit. This application was rejected by the Company Law Board on 17th June, 1995. The main petition was thereafter heard from 16th of October 1995 onwards.

5. On 12th of January, 1996 Shrihari Rao filed another company application for appointment of an administrator. During the hearing of this application, the petitioner in the said petition took further time for filing a better affidavit in support of their application and the application was adjourned to 4th December, 1996. The hearing of the main company petition was adjourned to May, 1997 at the instance of the petitioners therein. We have set out these facts as the grievance of the 1st respondent in his writ petition is: Company Law Board has failed to pass an order.

6. During the pendency of all these proceedings before the Company Law Board, on 5.10.1996 the 1st respondent filed a writ petition under Article 226 of the Constitution before the High Court of Andhra Pradesh for a writ of mandamus directing Union

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1997 Supreme(SC) 786

IMPORTANT POINTUnder an excuse that the Company Law Board has not yet made an order, a shareholder cannot be allowed to by pass the express provisions of the Companies Act and move the High Court under Article 226 of the Constitution for prevention of oppression and mismanagement.

Cases Referred (1)

IMPORTANT POINT
Under an excuse that the Company Law Board has not yet made an order, a shareholder cannot be allowed to by pass the express provisions of the Companies Act and move the High Court under Article 226 of the Constitution for prevention of oppression and mismanagement.