JUDGMENT - S.W. PURANIK, J.:---The petitioner M/s Hariganga Cement Limited is a public limited Company duly incorporated and registered under the Companies Act, 1956, and this petition by the said company is directed against the common order bearing reference No. 20/1/86. Cl-I dated 31-7-86, passed by the respondent No. 1 the Company Law Board, in a petition filed before it under section 250 read with sections 237 and 247 of the Companies Act, 1956 as well as a petition filed under sections 408 and 409 of the Companies Act, 1956. By the said impugned Order, the company Law Board has directed investigation into the affairs of the petitioner company (hereinafter referred to as 'the Company) under section 237 of the companies Act, while dismissing the application under section 408 and 409 of the Companies Act and partially allowing the application under section 237, 247, 250 of the Companies Act. 2. Brief facts leading to the present petition may be stated as follows : " The petitioner-company was promoted for setting up a mini cement plant in Chandrapur District of Maharashtra State and was incorporated in March 1979. The plant has been set up and has gone into production from the end of June 1986. The said company is Financed by various financial institution including nationalised banks, Industrial Development Bank of India Limited (IDBI), Industrial Credit and Investment Corporation of India Limited (ICICI), Industrial Finance Corporation of India (IFCI), and Investment Corporation of Maharashtra Limited (ICM). 3. One Shri. T.L. Arora, a non-resident Indian was the Director of the said company from June 1981 to March 1986 and is also a share-holder holding 20,000 Equity shares in his own name and 20,000 Equity shares held by him jointly with his wife. The said Shri Arora, it is alleged by the company, started creating difficulties in the management of the company with the sole object or taking over the control and management of the company. It is further alleged that he retired from the office of the Director by rotation on 31-3-1986 and failed to get himself-re-elected to the Boards of Directors. The said Shri Arora, it is alleged by the company, started creating difficulties in the management of the company with the sole object or taking over the control and management of the company. It is further alleged that he retired from the office of the Director by rotation on 31-3-1986 and failed to get himself-re-elected to the Boards of Directors. It is then alleged by the company that the said Arora and his associates went to extent of proposing a resolution at the Annual General Meeting held on 31-3-1986 for removal of Shri G.R. Agarwal, Chairman and Shri O.P. Agarwal, Director, of the Company, who where the main promoters of the petitioner-company, and sought to get two of his associates as Directors in the resulting vacancies. The said resolution failed as it could not be proposed and seconded. 4. As already stated above, the Annual General Meeting of the Company was scheduled on 31- 3-1986, when one Shri K.R. Batra, another share-holder, filed an application under section 237, 247 and 250 of the Companies Act, before the Company Law Board. Shri T.L. Arora, also filed an application under section 408 and 409 of the Companies Act. The allegations made in these applications were substantially same. Some of the allegations made in the above applications may be stated as follows :--- (1) That the Chairman and his brother had diverted funds of the company and siphoned out the same through series of transactions to other sister concerns; (2) That the Annual General Meeting of 31-3-1986 was mis-conducted; and (3) That Shri G.R. Agarwal had invested over Rs. 25 lakhs in the names of poor and illiterate villagers of Jeetpura, Haryana in the sum of Rs. 10,000/- to Rs. 25,000/- each even though those persons had no resources. It, is therefore, Shri G.R. Agarwal who is actively controlling the affairs of the company on the basis of such bogus shares. to substantiate these allegations, the said Arora had collected signatures and thumb impressions and statements from the said villagers, who have stated that they had never applied for such shares . 5 The respondent No. 1-Company Law Board on hearing both the parties, passed the following order :--- xxx xxx 25. to substantiate these allegations, the said Arora had collected signatures and thumb impressions and statements from the said villagers, who have stated that they had never applied for such shares . 5 The respondent No. 1-Company Law Board on hearing both the parties, passed the following order :--- xxx xxx 25. In regard to maintainability of an application under section 409 of the Act, the condition precedent is that the applications should be made by either a director, managing director or other persons holding certain positions as mentioned in section 409. Since Shri Arora did not hold any of these positions at the relevant time and it has also not been shown that any of his co-applicants held the same when the application was made, it is clear that the said is not maintainable . 26. With regard to the application under section 408 it may be mentioned that the applicant No. 2 has not been able to prove most of the allegations in particular the one relating to advances of Rs. 1.64 crores said to have been given to companies connected with Shri G.R. Agarwal. The remaining transaction have been reasonably explained by the respondents. It is also significant that the financial institutions are actively, associating themselves with conducting the affairs of the company and have suggested professionalisation of the Board of Directors, described in para-11 supra and appointment of concurrent auditors. These should adequately take care of proclivity, if any, towards mismanagement and we do not think if any further preventive action under section 408 of the Companies Act is warranted. xxx xxx xxx It may not be out of place to mention here that before the above order was passed by the respondent No. 1 Company Law Board, the petitioner Company who was respondent there in had been duly noticed and they had filed their detailed statement and explanations before the company Law Board. All the allegations in the applications of Mr. Arora and Batra were denied. The Company Law Board ,while rejecting both the applications of Mr. Arora and Batra, made only one advance observation to the affect that satisfactory answers to the allegations that a large number of villagers had been put up as front by Shri G.R. Agarwal have not been furnished. Arora and Batra were denied. The Company Law Board ,while rejecting both the applications of Mr. Arora and Batra, made only one advance observation to the affect that satisfactory answers to the allegations that a large number of villagers had been put up as front by Shri G.R. Agarwal have not been furnished. Thus , it appears to be the only reason given by the Company Law Board that it was not satisfied with the replies given on behalf of the petitioner Company. 6. We have detailed the findings arrived at by the respondent No. 1 Company Law Board from paragraphs 25 and 26 of its Order, where in it may be noticed that the application under section 409 of the Companies Act was not maintainable and the other applications under section 408, it was stated, that the applicant ,have not been able to prove most of their allegations, while remaining transactions have been reasonably explained by the respondent therein. The Company Law Board also taken into account all the facts that financial institutions were actively associating themselves with the affairs of the Company and that these should adequately take care of proclivity, if any, towards mismanagement and that no further preventive action under section 408 of the Companies Act is warranted. 7. Inspite of the above categorical finding, the Company -Law Board , in paragraph -27 of the impugned order states as follows :- 27. However, in regard to the request for investigations under section 237, 247 and 250, satisfactory answers to the allegations that a large number of villagers had been put up as front by Shri G.R. Agarwal have not been furnished . It is also seen that the IDBI ordered some investigations into the affairs of the Company. Therefore, a probe inter alia into the related issue of purchase of shares by the villagers seems necessary. It is also seen that the IDBI ordered some investigations into the affairs of the Company. Therefore, a probe inter alia into the related issue of purchase of shares by the villagers seems necessary. Since this is an important point on which we are not satisfied with the replies from the Company we feel necessary that the affairs of the Company should be investigated with a view to ascertain the correctness or otherwise of the various allegations made in the petitions including the aforesaid." As operative Order annexed to the impugned Order, however, states that "there are circumstances suggesting that the persons concerned in the management of its affairs have been guilty of misconduct towards the Company, and some of its members, more specifically certain villagers of Jeetpura in Haryana; and whereas the Company Law Board considered it necessary to appoint an Inspector to investigate into the affairs of the company and report thereon ……………..hereby appoints Shri V. Govindan, Joint Director (Inspection) Department of Company affairs, Shastri Bhavan, New Delhi as Inspector to investigate into the affairs of the company and to report to the Company law Board ………" 8. It is to be noted that even in the final conclusions in paragraph-27, the Board was held that no satisfactory answer was given in respect of the benami share-holders, and that a probe inter alia into the related issue of purchase of shares by the said villagers seems necessary. The Board further directed that the affairs of the Company should be investigated with a view to ascertain the correctness or otherwise of the various allegations made in the petitions including the aforesaid. 9. Shri V.R. Manohar, the learned Counsel for the petitioner-Company, attacked the impugned Order as arbitrary whimsical, irrational and perverse. He criticised the same as an order which is a result of total non-application of mind on the part of the respondent No. 1. He also contended that on the basis of the available facts and circumstances which were placed before the respondents No. 1 Board, it was impossible for any reasonable person much less the company Law Board to opine therefore suggestive of the things mentioned in Clause (i), (ii) and (iii) of section 237(b) of the Companies Act. According to the petitioner, the impugned order certainly is contrary to the findings recorded by the respondents No. 1-Company Law Board itself. According to the petitioner, the impugned order certainly is contrary to the findings recorded by the respondents No. 1-Company Law Board itself. The impugned order has also no nexus with the finding recorded in the body of the impugned order. Further no reasonable body of person, properly versed in law, could have passed the impugned order and hence, the impugned order can be branded as arbitrary and capricious. 10. Shri Ramesh Darda, the learned Counsel for the petitioner of the respondents, Company Law Board and the Union of India, supported the impugned Order. According to him, there were sufficient circumstances and facts brought on record, which were sufficient for the Board of act and direct investigation into the affairs of the company in so far as the contention of the petitioner-company that while in the body of the order the Board had decided to order inquiry only in respect of the bogus shares held benami in the names of the villagers in Haryana, yet the final order directs investigation into the entire company, is concerned Shri Darda stated that apart from the said allegations and documents of the villagers, two applications of Shri Arora and Batra were also before the Board contending several allegations in the matter of management of the affair of the company. He further submitted that the subjective satisfaction arrived at by the Board on the basis of these facts cannot be challenged before this Court. At the time of hearing of this petition, we had secured the records and papers, which were before the respondents No. 1, when it had passed the impugned order. With the assistance of the both Counsel, we have perused all the documents in detail. 11. Some of the principle governing the Orders passed by the Company Law Board under section 237(b) of the Companies Act may be borne in mind. The earlier view of the Supreme Court reported in (The State of Madras v. C.P. Sarathy and another)1, A.I.R 1953 S.C. 53 was not approved subsequently. 11. Some of the principle governing the Orders passed by the Company Law Board under section 237(b) of the Companies Act may be borne in mind. The earlier view of the Supreme Court reported in (The State of Madras v. C.P. Sarathy and another)1, A.I.R 1953 S.C. 53 was not approved subsequently. In the said decision in 1953, the Supreme Court had held that "whenever a provision of law confers certain power on an authority on its forming a certain opinion on the basis of certain facts the courts are precluded from examining whether the relevant facts on the basis of which the opinion is said to have been formed were in fact exists." This decision in 1953 has been overruled by the subsequent decision of the Supreme Court in the matter of (Rohtan Industries Ltd. v. S.D. Agrawal and another)2, reported in A.I.R. 1969 Supreme Court 707, in which the Supreme Court have observed that the 1953 decision cannot be considered as authority for this preposition. It was further held by the Supreme Court, approving the decision in (Barium Chemical's case)3, A.I.R. 1967 S.C 295 that "the existence of circumstances suggesting that the company's business was being conducted as laid down in sub-clause (1) of the persons mentioned in sub-clause (2) were guilty of fraud of misfeasance or other misconduct towards the Company or towards any of its members is a condition precedent for the Governments to form the required opinion and if the existence of these conditions is challenged, the courts are entitled to examine whether those circumstances were existing when the order was made. In other words the existence of the circumstances in question is open to judicial review though the opinion formed by the Governments is not amenable to review by the courts…..". Thus, even through the subjective opinion formed by the Company Law Board is not amenable to challenge, the judicial courts can certainly look at the circumstance as to whether they were existing, or if they were existing, whether they had any nexus to the opinion formed by the Company Law Board. 12. It is well settled that the discretionary powers under section 237(b) of the Companies Act must be exercised honestly and not for corrupt or ulterior purposes. The authority must form the requisite opinion honestly and after applying its mind to the relevant materials before it. 12. It is well settled that the discretionary powers under section 237(b) of the Companies Act must be exercised honestly and not for corrupt or ulterior purposes. The authority must form the requisite opinion honestly and after applying its mind to the relevant materials before it. It exercising the discretion the authority must have regard only to circumstances suggesting one or more of the matters specified in sub-clause (i), (ii) and (iii) of section 237(b) of the Companies Act. It must act reasonably and not capriciously or arbitrarily. It will be an assured exercise of discretion, if, for example, the authority forms the requisite opinion on the ground that the director incharge of the company is a member of a particular community. Within these narrow limits the opinion is not conclusive and can be challenged in court of law, (refer paragraph-45 of the Rohtan Industries Ltd.'s case, A.I.R. 1969 S.C.C 707). The Supreme Court has also observed in the above case at Paragraph-46 that "if it is established that there were no materials upon which the authority could form the requisite opinion the Court may infer that the authority did not apply its mind to relevant facts. The requisite opinion is then lacking and the condition precedent to the exercise of the power under section 237(b) is not fulfilled." 13. On perusal of the records and papers, we find that the applications of Shri. Batra and Arora have been rejected and could not be considered as they were not supported by affidavits. However, the company Law Board seems to have relied upon the so called documents or statements of some villagers from Harayana inter alia contending that they had never applied for the shares of the petitioner-company nor had they contribute any amount. The true copies of the said documents are at Annexures E.F.G and G to this petition. A scrutiny of the said documents show that the affidavits are not by the shareholders themselves, but by some of the relatives of the recorded share-holder. Some of the affidavits are not even sworn and are mere chits bearing thumb impressions or signature of the villagers. Such documents, in our opinion, cannot form the basis of even purported existence of any material before the Company Law Board. 14. Some of the affidavits are not even sworn and are mere chits bearing thumb impressions or signature of the villagers. Such documents, in our opinion, cannot form the basis of even purported existence of any material before the Company Law Board. 14. In the return filed on behalf of the respondent No. 1, the Company Law Board, it has been sought to be contended that apart from the documents purporting to be the statements of the benami villages shareholders, two applications of Shri Batra and Arora were also before the Board, which contained serious allegations regarding the mis-management of the affairs of the petitioners Company. Shri Darda, the learned Counsel for the respondents, has also taken the same stand during his arguments. We do not find that such contention can be accepted at all, for the simple reason that the speaking order passed by the Board at Annexure-A clearly brushes aside the "applications filed by Batra and Arora, and they have categorically concluded that most of the allegations in the applications were not substantiated, whereas the remaining allegations have been duly explained by the Company. The only material on the basis of which the impugned order is based, is the statement of the villagers from Haryana and if that is the only circumstance which was in existence at the time of passing of the opinion by the Board, then application no circumstance can be placed now during the arguments or in the return. The opinion formed by the Board is squarely based only on the statements of the alleged villagers a from Haryana, and we have already found that the said statements have no nexus with the mis-management of the affairs of the petitioner-company. In fact, even if the allegations in the villagers' statement may be true, it may amount to an offence by the individual person concerned, who has secured the benami share, in the name of the said villagers. It does not reflect the management of the affairs of the company for such an act of holding unauthorised benami shares, there are independent provisions under the additional the Companies Act for taking action against such shareholder who has secured benami shares 15. It does not reflect the management of the affairs of the company for such an act of holding unauthorised benami shares, there are independent provisions under the additional the Companies Act for taking action against such shareholder who has secured benami shares 15. The discretionary powers vested in the Company Law Board under section 237(b) of the Companies Act are of a very wide nature and the said powers have to be exercised with great conception and retrospection in a judicious manner. The powers under section 237 have been conferred on the Control Government on the faith that it will be exercised in a reasonable manner. The department of the Central Government which deals with companies is presumed to be an expert body in company law matters. Therefore, the standard that is prescribed under section 237(b) is not the standard required of any ordinary citizen but that of an export. Hence, if the court comes to the conclusion that no reasonable authority would have passed the impugned order on the material before it, then the same is liable to be struck down 16. The formation of the opinion under section 237 of the Companies Act by the Central Governments is subjective, but the existence of circumstances relevant to the ignorance as to the sine qua non for action must be demonstrable. It is not reasonable to say that the clause permits the Government to say that it has formed the opinion on circumstances which it thinks exist. Since the existence of "circumstances" is a condition fundamental to the making of an opinion, the existence of the circumstances, if question in Court, has to be proved at least prima facie. It is not sufficient to say that the circumstances exist and give no clue to what they are, because the circumstances must be such as to lead to conclusion of certain definitiness. When it is challenged that the opinion has been formed mala fide or upon extraneous or irrelevant matters, the respondent must disclose before the Court, the circumstances which will indicate that his action was within the four corners of his own powers. 17. We have already observed that none of the circumstances which could have led to the conclusion arrived at by the respondent No. 1. Board were in existence. 17. We have already observed that none of the circumstances which could have led to the conclusion arrived at by the respondent No. 1. Board were in existence. On the other hand, we have seen from the return and from the oral submissions of the learned Council for respondents that certain reasons have been added now to substantiate the opinion formed by the respondent No. 1-Board. Such reasons stated afterwards cannot justify the order in retrospect, if they were not available to the authority at the time of exercising its powers in arriving at the opinion. In fact, other circumstances which were before the Court was already considered and rejected. 18. As stated earlier by us, even though wide powers have been conferred on the respondent No. 1-Company Law Board, yet they must be exercised in reasonable manner. It is pertinent to note that such an order has adverse effect on the reputation and credibility of the petitioner Company and may cause grave prejudice to it affairs and may also give rise to consequences which could not be allowed to take place at the cost of the petitioner-company's interest. The Company law Board, in its speaking order (Annexure-A) has also observed that several financial institutions, such as I.D.B.I., I.C.I.C.I., I.F.C.I. etc. have actively associated themselves with the management of the Company, who are duly represented on the Board of Directors and that should take adequate care of any proclivity, if any, towards mismanagement of the Company. 19. In view of the above discussion, we have no hesitation to strike down the impugned Order at Annexure-A and its operative part appointing the Inspector for investigation into the affairs of the petitioner-Company. 20. In the result, the writ petition is allowed. Rule made absolute as above, in the circumstances of the case there shall be no order as to costs. Petition allowed. -----