Rohtas Industries Limited v. S.D. Agarwal & Anr

By- Dhruv Chadha[ii]

Introduction

The instant case (Rohtas Industries Limited v. S.D. Agarwal & Anr [i]) was one that involved an investigation ordered into Rohtas Industries Ltd. for suspected violations of the Companies Act. One might then ask what relation this case has to competition law! Until quite recently, its relevance lay dormant. However, the Delhi High Court, in the case of Google Inc. & Ors v. Competition Commission Of India & Ors.[iii], relied on this case to note the adverse effect of investigations, on the credit and competitive position of a company ( in spite of a positive outcome for the company). This case analysis will briefly summarize the position of the Court, and attempt to provide a nuanced link with Competition Law.

Brief Facts

The Ministry of Commerce and Industry, Department of Company Law Administration had passed an order appointment a Chartered Accountancy Firm to investigate the books of accounts of Rohtas Industries Limited, and point out any irregularities to the Central Government with respect to the Companies Act, or any other law in effect at the time.

The investigation had been initiated, as the Government was of the opinion, that, “circumstances suggesting that the business of Rohtas Industries… 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

This investigation, had been extended on a number of occasions, and while that fact in itself, was not an issue the case, the lack of any material before the Government to suggest that they were of the opinion as reproduced above, was the primary point in the case.

Summary of Contentions and Legal Principles/Statutes Relied on.

One of the primary facts that were relied on, to initiate investigation against the Company, were the allegations of fraud against one of the directors, for alleged misconduct in relation to other companies he was in control of. While the Government maintained relevancy of this, the Appellants eschewed the acceptance of the same by the Company Board in upholding the validity of the order.

The impugned sections were Sections 235-237 of the Companies Act[iv]. The sections considered dealt with the powers conferred to the Government which enabled them to pass the order that the relevant ministry did. The bone of contention lay in the standard prescribed under S. 237(b).

An interesting principle contended was the Wednesbury Principle.[v] This shall be discussed at length in the section of this Article dealing with Competition Law.

Opinion of the Court

The majority opinion on behalf of Justices S.M. Sikri and K.S. Hegde was delivered by Justice Hegde.  Justice Bachawat delivered a separate Opinion.

Initially, parallel was drawn between the provisions of the Companies Act, and Section 10 (1) of the Industrial Disputes Act. In this regard, the case of State of Madras v. C. P. Sarathy and Another [vi] was relied on, where the question of the scope of the section was considered. The question of law lay in whether or not the opinion formed by the State Government was open to judicial review. Taking into account the administrative nature of the act, the Court decided against a close “canvassing: of the order in a bid to see if any material was actually placed before the Government, while it made an order. Here, a judicial/quasi-judicial determination was distinguished from an administrative act. The former was found to have hypothetically given the power to a party to challenge a resulting award on account of non-existence of an industrial dispute.

While judicial caution was indeed advised, in the process of analyzing the sections of the Company Act, the Court affirmed the legislative intent to ensure that an investigation was not called upon “except on good ground”. This was reasoned to be account of the serious nature of the investigation, as well as the likely “press publicity” and the possibility of an adverse effect on the reputation and prospects of the Company.

The Court therefore, did not find favour in the Arguments laid down by the Government, rejecting them by relying on the case of Barium Chemicals and Anr. v. Company Law Board and Anr.[vii],  which held, inter alia, that the court was not precluded from determining the existence of material before the Government on the basis of which, an opinion had been formed.

On the further question of the “expertise” of a body such as the Government,  the court found that it was charged he Government is charged with a grave responsibility of forming a bona-fide opinion, unclouded by any irrelevant facts or incidents.

Justice Bhachawat, in his opinion, made a few additions such as the non-communication of certain allegations to Rohtas Industries, and lamented the fact several of the cases cited were “not helpful” in truly gauging and interpreting section 237(b). Justice Bachawat, however did agree with the judgement written by Justice Hegde.

A Competition Law Perspective

This judgement, as mentioned above, gained certain prominence with respect to Competion Law in the Google v. CCI case. The section being dealt with in this regard, was Section 26(1) of the Competition Act, which reads: On receipt of a complaint or a reference from the Central Government or a State Government or a statutory authority or on its own knowledge or information, under section 19, if the Commission is of the opinion that there exists a prima facie case, it shall direct the Director General to cause an investigation to be made into the matter.  The parallel with Section 237(b) of the Companies Act of course lies in the words “is of the opinion that there exists a prima facie case” The court in this respect, while not overturning the opinion the court in SAIl[viii] (which upheld the principle that a party being investigated, had no right to be heard at the Section 26(1) stage) found favour with allowing an Article 226 petition to correct an error. Factors such as the “drastic” effect of the measure were entertained.

In this regard, the Wensbury Principle of reasonableness may be considered. The Principle, which allows judicial intervention in the event of “irrationality”, has been opined to hold limited relevance in EU and UK competition proceedings[ix]. However, a reference to the case of Hoffmann – La Roche v Secretary of State for Trade[x] reveals that even at the investigation stage, minimum levels of natural justice are a requirement.

In light of the several CCI orders being remanded to CCI by the COMPAT on account of violation of principles of natural justice, this judgement stands as an appropriate lesson on the requirement of meeting at least a certain standard in light of the drastic effect that even an investigation has on the reputation of any company.

[i] 1969 AIR 707, 1969 SCR (3) 108

[ii] 2nd Year B.B.A.LL.B.  Student of the National Law University Jodhpur

[iii] 2015 Comp LR 391 (Delhi)

[iv] The Companies Act, No. 1 of 1956, §235-237 (Ind.)

[v] As Propounded in the case of Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn.

[vi]  AIR 1953 SC 53

[vii] [1966] Supp. S.C.R.311

[viii] ( 2010 ) 4 Comp LJ 1 ( SC )

[ix] Sandra Marco Colino, Competition Law of the EU and UK 102

[x] [1975] AC 295

Disclaimer: This article has been written by a member of Centre for Competition Law and Policy. The article is just an opinion of the Author and no legal consequences follow from the same

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