Delhi Gymkhana Club Ltd vs Union Of India Ministry Of Corporate ...

(Arising out of Order dated 26.06.2020 passed by the National Company Law Tribunal, New Delhi, Principal Bench in C.P. No. 71/2020)

IN THE MATTER OF:

Union of India, Ministry of Corporate Affairs ...Appellant

Versus

Delhi Gymkhana Club Ltd. &Ors. ...Respondents

Present: For Appellant: Mr. K. M. Nataraja, ASG with Mr. Vatsal Joshi, Advocate and Dr. Raj Singh, Director RD NR, Mr. Sanjay Shorey, Director Legal, Ms. Seema Rath, Mr. Parvez Naikwadi, Mr. Shailesh Madiyal, Mr. Nagachandran Easwaran, Ms. Kusum Yadav, Mr. Sughosh SN and Mr. Sudhanshu Prakash.

For Respondents: Mr. S. N. Mookherjee, Sr. Advocate Mr. Arun Kathpalia, Sr. Advocate Mr. Gaurav M. Liberhan, Sr. Advocate and Mr. Ash Khanna, Advocate for R-1. Ms. Rohini Musa, Mr. Pulkit Deora, Ms. Garima Prashad and Mr. Sylvine Sarmah, Advocates for R-18. Col. Ashish Khanna, Secretary, Gymkhana Club

With Company Appeal (AT) No. 95 of 2020

IN THE MATTER OF:

Delhi Gymkhana Club Ltd. ...Appellant

Versus

Union of India, Ministry of Corporate Affairs &Ors. ...Respondents 2

Present: For Appellant: Mr. S. N. Mookherjee, Sr. Advocate Mr. Arun Kathpalia, Sr. Advocate Mr. Gaurav M. Liberhan, Sr. Advocate. Mr. Ash Khanna, Advocate For Respondents: Mr. K. M. Nataraja, ASG with Mr. Vatsal Joshi, Advocate and Dr. Raj Singh, Director RD NR, Mr. Sanjay Shorey, Director Legal, Ms. Seema Rath, Mr. Parvez Naikwadi, Mr. Sarthak Bhardwaj, Mr. Shailesh Madiyal, Mr. Nagachandran Easwaran, Ms. Kusum Yadav, Mr. Sughosh SN and Mr. Sudhanshu Prakash. Ms. Rohini Musa, Mr. Pulkit Deora, Ms. Garima Prashad and Mr. Sylvine Sarmah, Advocates for R-18.

BANSI LAL BHAT, J.

Pending consideration of CP No. 71/2020, National Company Law

Tribunal ("Tribunal", for short), New Delhi, Principal Bench, being of the view

that a prima facie case demonstrating that the affairs of the 'Gymkhana Club'

("Club", for short) are being conducted in a manner prejudicial to the public

interest, passed interim order dated 26th June, 2020 within the ambit of

Section 242(4) of the Companies Act, 2013 ("Act, 2013", for short) for

regulating the conduct of the company's affairs by directing Union of India to

appoint two nominees of its choice as Members in the General Committee to

monitor the affairs of the Club along with other General Committee Members

and give suggestions to the General Committee and also directed the Union of 3

India to constitute a Special Committee with five Members of its choice to

enquire into various issues including affairs of the Club, utility of the land

leased out by the State, constructions in progress, Articles and Memorandum

of Association and membership issues including waitlist, adherence of the Club

to the Rules and for making recommendations suggesting for better use of the

Club premises. Besides directions were given to General Committee not to

proceed with construction or take any policy decisions or effect any changes in

the Memorandum of Association and Articles of Association. The Club was also

restrained from operating the funds received for admission of Members.

Holding of elections was also stayed. Union of India, though satisfied that the

Tribunal has found a prima facie case in its favour warranting grant of interim

relief, is aggrieved of the order on the ground that the same does not grant

effective and efficacious remedy to stem the rot. Company Appeal (AT) No. 94 of

2020 thus came to be filed by the Union of India impugning the order dated

26th June, 2020 passed by the Tribunal under Section 242(4) of the Act, 2013

to the extent of interim relief granted thereunder as being inadequate and

praying for modification of the relief by providing for nomination of an

Administrator by the Central Government to manage the affairs of Club.

Company Appeal (AT) No. 95 of 2020 has been preferred by the Club against

Union of India & Ors. impugning the aforesaid order on various grounds set

out in the memo of appeal and seeking setting aside of the impugned order. 4

2. Both appeals, arising out of the same impugned order dated 26th June,

2020 were clubbed and heard together. This common judgment is formulated

to govern the fate of both appeals.

3. The background facts giving rise to the controversy involving allegations

of mismanagement and leading to filing of the Company Petition by Union of

India under Section 241(2) of the Act, 2013 before the Tribunal need to be

noticed insofar as they are relevant. The Club came to be incorporated on 14th

July, 1913 as a Company (limited by guarantee) under Section 26 of the

Companies Act, 1913 (corresponding to Section 25 of the Companies Act,

1956/ Section 8 of the Companies Act, 2013) under the name and style

'Imperial Delhi Gymkhana Club Ltd.' with its Registered Office presently

situated at 2nd, Safdarjung Road, New Delhi as a non-profit company, inter alia,

with objective to promote sports and pastimes under licence from the Central

Government to carry out its functions subject to the conditions and regulations

binding on the Club. The Club has been operating for more than a century in

27 acres of land leased out by the then Government. Respondent Nos. 2 to 17

before the Tribunal were the General Committee Members for the year 2019-

2020 out of whom Respondent No.2 was acting as President of the GC while

Respondent No.18 was working as Secretary/ CEO of the Club. Respondent

No.19- the Ministry of Housing and Urban Affairs is the lessor of 27.03 acres of

land given on perpetual lease to the Club in 1928 under a lease deed executed

inter se the Secretary of State for India in Council (British India) and the

Imperial Gymkhana Club Limited (the erstwhile name and style of the Club), 5

the prefix "Imperial" having been dropped in the year 1959 after lapse of

paramountcy of the British Empire and adopting of Constitution of India. The

Club, with its main objective, being to promote various sports and pastimes

and other objectives set out in the Memorandum of Association, has a limited

membership. The number of permanent members is 5600. However, the users

of the Club are stated to be double the number of permanent members. Based

on complaints received by the Government against the Club, Ministry of

Corporate Affairs, Government of India issued order dated 16th March, 2016

directing inspection of the Club by invoking powers vested in it under Section

206 (5) of the Companies Act, 2013. The nature and content of the complaints

is referred to in para 8 of the impugned order and the violations borne out from

the Inspection Report have been taken note of in para 9 of the impugned order.

Keeping the same in view, Ministry of Corporate Affairs directed to take penal

action against the Club management, auditors of the Club besides revocation

of license of the Club, removal of the existing management, appointment of

Government Directors and carrying out supplementary inspection to take up

issues related to allotment of membership, money received from the new

applicants as registration fee for membership, accounting treatment of the

amount received from new applicants, investments made by the Club from

such membership fee and with regard to the processing charges received from

the Applicants. As a sequel to the Inspection Report and action taken thereof,

the Inspectors filed the supplementary Inspection Report dated 3rd March,

2020 which detailed numerous violations and mismanagement of the affairs of 6

the Club disclosing that the GC had been acting in violation of Articles of

Association of the Club and the provisions of the Companies Act, 1956/ 2013

which was detrimental to the public interest, such violations being gross and

extreme in nature and bringing it to fore that the GC members had acted in an

autocratic manner to confer benefits on chosen members of the Club in

hereditary manner at the cost of general public.

4. The case set up by the Union of India before the Tribunal is that the Club

which limited its access only to the Government officers and limited number of

non-government people virtually barred entry of many people who applied for

membership to seek membership even after waiting for decades as the children

of permanent members managed to sneak in under the garb of being

dependents of permanent members, thereafter as green card holders and

finally as UCPs holders frustrating the desire of people on the wait list.

According to Union of India, the money taken from the waitlisted applicants

was being utilized for the usage of the Club by persons coming through various

channels which was alleged to be unfair and prejudicial to public interest. The

stand taken by the Club, on the contrary, is that the Club is entitled and

empowered to decide the membership issue in accordance with the Articles of

Association and its action cannot be called in question by the Government on

the ground of being prejudicial to public interest. The Club further pleaded that

the premises housing the Club has been leased out to it in perpetuity and the

Club has been paying the rent regularly. It is denied that the Club was being

used for purposes other than the objects mentioned in the Articles of 7

Association. It was further pleaded that the land had been allotted to the Club

for sports and pastimes along with other objectives which have neither been

altered nor is the Club pursuing any other objective. The further stand taken

by the Club before the Tribunal was in regard to maintainability of the

Company Petition on the ground that the opinion in regard to affairs of the

Club being conducted in a manner prejudicial to the public interest is bereft of

reasons and application of mind.

5. Union of India filed Company Petition under Section 241(2) of the

Companies Act, 2013 against the Club and its GC members as also the

Ministry of Urban Affairs alleging that the affairs of the Club were being

conducted in a manner prejudicial to public interest, therefore, seeking

nomination of 15 persons by the Central Government as Directors of the GC of

the Club to manage its affairs besides restructuring of the Club to ensure its

functioning in conformity with its Articles of Association. Interim relief was

sought to suspend the GC and appoint Administrator nominated by Union of

India to manage the affairs of the Club as also to ban acceptance of new

membership or fees or any enhancement thereof till disposal of waitlist

applications. The Club and other Respondents in Company Petition, while did

not file reply to the main petition, resisted the interim relief on two points:-

(i) formation of opinion is not supported by grounds and cognizance has

not been taken into at the time of forming opinion

(ii) lack of public interest.

8 6. On consideration thereof, the Tribunal granted interim relief in terms of

Section 242(4) of the Act, 2013 after coming to conclusion that a prima facie

case for relief sought was made out. The operative part of the impugned order

reads as under:-

"75. For the reasons aforementioned, I have found prima facie case demonstrating that the affairs of the Club are being conducted in a manner prejudicial to the public interest therefore I hereby direct Union of India to appoint two of its nominees of its choice as Members in the General Committee to monitor the affairs of the Club along with other GC Members and give suggestions to the GC, and direct the Union of India to constitute a Special Committee with five Members of its choice to enquire into the affairs of the Club, utility of the land leased out by the State, with regard to constructions in progress without requisite approvals or with approvals, suggestions for changes in Articles and Memorandum of Association, membership issues including waitlist and bout accelerated membership, adherence of the Club to the Rules governed by Section 8 of the Companies Act, 2013 and other miscellaneous issues if any and file report of recommendations suggesting for better use of the Club premises for the larger good in a transparent manner on equity basis within two months hereof.

76. This Bench further directs the general committee that it shall not proceed with construction of further construction on the site, it shall not make any policy decisions and it shall not make any changes to the Memorandum of Association or Articles of Association and it shall not deal with the funds received for admission of Members and it shall not conduct balloting until further orders. The GC is given liberty to carry day to day functions of the Club by using funds of it other than fee collected from applicants. All these directions shall remain in force until further orders".

7. As noticed at the very outset, while the Company Appeal (AT) No. 95

preferred by the Club assails the finding recorded by the Tribunal as regards 9

maintainability of the Company Petition as also existence of prima facie case for

grant of interim relief in favour of Union of India, Company Appeal (AT) No. 94

of 2020 preferred by Union of India assails the impugned order only to the

extent of interim relief granted which is said to be inadequate and not

efficacious. Since the issue relating to the interim relief being not efficacious or

inadequate would be dependent on the finding in regard to maintainability of

the Company Petition and existence of prima facie case for grant of interim

relief, we deem it appropriate to first come to grips with Company Appeal (AT)

No. 95 of 2020.

8. Sh. S.N. Mookherjee, Senior Advocate representing the Club submitted

that no opinion has been formed by the Central Government and in the

absence of any such opinion, the Tribunal cannot assume jurisdiction in any

matter under Section 241(2) of the Act, 2013. It is submitted that the

ostensible sanction dated 18th March, 2020 to file a petition under Section

241(2) does not constitute formation of an opinion and there being a complete

absence of public interest in the allegations in the Company Petition, the

jurisdictional hook of conduct of its affairs in a manner prejudicial to public

interest did not arise. It is further submitted that the Inspection Report and

supplementary Inspection Report do not at all render any finding in regard to

the affairs of the Club or its affairs being conducted in a manner prejudicial to

public interest. Therefore, order passed by the Tribunal is without jurisdiction.

It is further submitted that the Tribunal has misdirected itself and

misconstrued "public interest" to exercise a jurisdiction where none existed. It 10

is further submitted that there is no opinion formed by the Central

Government for the purposes of Section 241(2) of the Act, 2013 nor has any

such opinion been placed on record. It is submitted that the two jurisdictional

conditions precedent must pre-exist before any petition under Section 241(2) is

to be filed: (i) the formation of an opinion by the Central Government; and (ii)

that the affairs of the company are being conducted in a manner prejudicial to

public interest. In absence of either, the petition is bound to fail at a very

threshold stage. It is submitted that there is no evidence of the formation of

any 'opinion' on record. The petition was filed by the Regional Director

asserting that he was duly authorized to file the petition vide sanction dated

18th March, 2020 which does not constitute an opinion within the meaning of

Section 241(2) of the Act, 2013. It is submitted that the Tribunal has casually

dealt with the second limb of the issue relating to maintainability of the

petition for want of any valid opinion while failing to deal with the first limb of

the issue pertaining to want of formation of opinion by the Central

Government. It is submitted that there is complete non-application of mind by

the Union of India and the formation of opinion on the basis of reiteration of

comments of the Inspecting Officer renders it non-est. It is submitted that the

Tribunal has glossed over the matter by ignoring the judgments of Hon'ble

Apex Court. Thus, it is submitted that error is obvious as the letter of 18th

March, 2020 is not an opinion and makes no reference to an opinion. Besides

it does not reflect any application of mind. It is submitted that for formation of

an opinion there must be sufficient evidence to arrive at satisfaction. The 11

standard of proof would ordinarily be such that would satisfy an unprejudiced

mind beyond reasonable doubt, objectively and not subjectively. It is submitted

that the opinion has to be formed on the basis of material and the validity and

the existence of opinion can be subjected to judicial review. If the opinion fails

to pass the muster of judicial scrutiny, the condition precedent would not be

fulfilled and the exercise of powers would be bad in law.

9. Sh. S.N. Mookherjee, Senior Advocate representing the Club next

contended that the petition ex-facie disclosed no public interest, therefore, the

petition against the Club would not lie. It is submitted that the Club is a

private members' Club for the benefits of its members where the public has no

interest. The Tribunal has a very limited scope of judicial review in the matter

of functioning of such Clubs which have absolute freedom to govern themselves

in accordance with their charters'. It is submitted that the Tribunal has

touched upon many concepts to virtually hold that there should be no private

members Club on perpetual leasehold land. It is submitted that the

management and affairs of a private club and its membership are matters

pertaining to private law and personal matters and no public law aspect or any

violation of statutory rights or fundamental rights is involved therein. Merely

because 27 acres of land have been given on perpetual lease to the Club to

carry out its activities does not by itself invoke 'public interest'. The lease is

still subsisting. It is submitted that there is no element of public interest made

out in the Company Petition, which does not concern the welfare of public/

society as a whole, affairs of Club do not concern citizens generally, public as a 12

whole has no pecuniary interest affecting their legal rights or liabilities in

relation to the management and affairs of the Club and there is no element of

public order, public health, public security, morals, economic welfare of the

public or the objects mentioned in Part IV of the Constitution of India. It is

thus contended that there is no public interest element involved in managing

the affairs of the Club. It is further submitted that the perpetual leasehold

rights over the land have been granted for the purposes of the Club, including

for banquets, concerts and dances and the lodging and boarding of the

members resident in the premises as reflected in Clause 6 of the lease deed.

Besides promoting sports and pastimes, kitchens, refreshment rooms, use of

the Club property by its members, hosting dinners, balls, concerts and other

entertainment incidental and conducive to the attainment to its objects are the

objects of the Club. The perpetual leasehold rights have been granted for the

exclusive use of the Club and its members and creates no public interest in the

affairs of the Club for the purposes of Section 241(1) of the Act, 2013. It is

submitted that mere violations of law do not constitute public interest. It is

submitted that the finding of the Tribunal is flawed inasmuch as mere

allotment of lease land does not make the Club amenable to public interest.

The fact that Government has leased land to the Club cannot be construed as

public interest in the affairs of the Appellant. It is submitted that there is no

allegation of any violation of the lease deed. It is submitted that the Club has

been or is being used for the very same purpose for which lease was granted in

favour of the Club in 1928. Taking strong exception to the observations of the 13

Tribunal that the perpetual lease granted to the Club was a 'State largesse', it

is submitted that the grant of perpetual lease can under no circumstances be

termed as 'largesse'. It is submitted that even in case of lease being a 'State

largesse', the Hon'ble Apex Court has recognized the need to recognize

government largesse as enforceable rights besides there is no misuse of the

land or violation of any of the terms of the lease deed. It is submitted that

'better utilization' of land is not a ground available to initiate an action under

Section 241(2) of the Act, 2013. Any violation of the terms of perpetual lease

deed may give rise to a contractual dispute to be agitated before a Civil Court

for appropriate remedies, but would not entitle Central Government to

maintain a petition under Section 241(2) of the Act, 2013.

10. It is submitted by Sh. S.N. Mookherjee, Senior Advocate that the

impugned order is contrary to Article 19(1) (c) of the Constitution of India.

Appellant, being an association of persons in the incorporated form, has the

absolute right to associate with only those whom the Club voluntarily admits.

Such right includes the right of continuance to the association. The association

is entitled to admit members and there can be no interference with formation

or membership or management except on the grounds set out in Article 19(4) of

the Constitution of India. The Company Petition is in the teeth of constitutional

protection granted to the Club. It is submitted that the Tribunal erred in not

understanding the import of this fundamental right and sought to curtail the

same in the name of Article 14.

14

11. It is further submitted that grant or non-grant of membership is non-

justiciable as no element of public interest is involved. Moreover, it is beyond

the purview of Courts and Tribunals. Elaborating upon it, learned counsel for

the Club submits that an application for membership being only a request for

invitation to be considered for membership does not vest any legal right in

favour of the persons seeking membership and the same is not justiciable in

law. An applicant who is denied membership cannot claim invasion of any right

as no right accrued to such person. It is for the Club to decide who it will admit

as a member, it being a sole preserve and right of the Club to grant or not

grant membership and there is no element of public interest involved in it to

render it justiciable. It is further submitted that the matters pertaining to

membership are not matters of public interest, but private matters and issues

of internal management only. It is pointed out that UCP's, Green Cards and

eminent persons are not permanent members but are members who have been

given the privilege to use the Club. A usage card, being either a Green Card or

User of Club Premises termed as UCP card is issued to such members.

Dwelling upon various classes of members and users of Club, it is submitted

that there are permanent members, garrison members, temporary members,

casual members, special category members, lady subscribers besides users of

Club like candidates pending election, children of members upon attaining age

of 21 years and dependent children of members below 21 years of age as

provided in the Articles of Association. It is further submitted that under

Articles of Association there is a cap on permanent membership with voting 15

rights restricting it to 5600. GC regulates the balloting of a candidate for

membership of the Club in a manner that ensures maintaining the proportion

of members belonging to Armed Forces of India or Civil Officers of Government

at about half of the total active membership. This is besides facilitating the

early admission of members of the Diplomatic Corps. This is aimed at

maintaining the distinctive character of the Club. Under Articles of Association

not less than half must be from the Government at the time of balloting for

election of membership. Subject to this there is no restriction on the powers of

GC and power to induct others vests in GC.

12. It is submitted on behalf of Club that there is a distinction between

permanent members of the Company and other members/ users of the Club

permitted use of Club premises. Special provisions have been made in Articles

of Association for children of members to permit them use of the Club, first as

dependent children and after attaining age of 21 years seeking membership.

Children below 21 years of age are issued dependent cards to permit use of the

Club and upon attaining age of 21 years they are issued green cards. It is

submitted that issuance of dependent card or green card is only for

administrative convenience and it does not clothe them with any voting right. A

green card holder is a user of the Club and it is only after passage of time that

upon his candidature being accepted and upon balloting by GC he gets a UCP

card. A UCP card holder becomes a permanent member only upon arising of

vacancy of a permanent member. It is submitted that the Tribunal was not

justified in coming to conclusion that the membership was hereditary. It is 16

further submitted that the Tribunal was also not justified in holding that the

applicants who applied for membership keep waiting for years. Learned counsel

for the Club further submitted that the Tribunal entered into the foray of

membership, which it could not do as it was not a public Club.

13. It is further submitted that the Tribunal erred in finding that the

membership application money submitted by prospective members was utilized

by the Club. It is submitted that such finding is not based on any evidence on

record. It is submitted that there is no public interest involved in so far as

deposit of money by the prospective member is concerned. It is submitted that

in any case this issue no more survives for consideration as the Club had

decided to refund such application money lying with it which otherwise also

was refundable on demand.

14. It is submitted on behalf of the Club that the Tribunal, instead of

deciding the legal issues, proceeded to make unnecessary and unwarranted

comments against the Club and its members reflecting a predetermined and

personal, prejudice and bias. Reference is made to observations made by the

Tribunal in paras 14, 17, 18, 20, 21, 32& 33 of the impugned order in this

regard. It is submitted that the Tribunal has allowed its socio economic

inclinations dictate the tenor, contents and findings of the impugned order.

Furthermore, it is submitted that the Tribunal has made generalizations and

comments unconnected to the issues arising in the petition. 17

15. It is further submitted that the Tribunal, while exercising jurisdiction

under Section 241(2) of the Act, 2013 cannot rewrite the Constitution or

expand the scope of Section 241 to conform to its personal socio-economic

prejudices and thereby destroy the basic structure of the Club. It is submitted

that grant or non-grant of such membership can never be the subject matter of

a petition under Section 241(2) of the Act, 2013 as no element of public interest

was involved therein. It is submitted that the Tribunal is supposed to exercise

jurisdiction to protect the entity viz. the Club and not destroy it. It is submitted

that the Tribunal was not justified in invoking Article 14 of the Constitution of

India which did not extend to Club membership. It is submitted that the Club

is a private body and not amenable to Article 14. It is constituted of and for its

members and does not serve the public nor perform public function. In terms

of Memorandum of Association, the Club is for enjoyment of its members alone.

It is further submitted that the Tribunal erred in holding that the Club was

under the principles of democracy. It is submitted that the Club is at liberty to

manage its affairs within the confines of its charter documents viz. MOA and

AOA. No breach of fundamental rights of any prospective members can be said

to be violated by the Club.

16. It is further submitted on behalf of the Club that the Tribunal erred in

drawing an artificial distinction between its objects as stated in the MOA. It is

submitted that a company is permitted to carry out activities as set out in the

objects clause of its MOA and the artificial distinction as sought to be made out

by the Tribunal is not recognized in law. It is further submitted that the finding 18

of the Tribunal that the Club acted in violation of its objects by incurring and

generating more expenditure from F&B than sports, is perverse as the MOA of

the Club itself allows for promotion of sports, pastimes and F&B. The Club may

generate revenue from any one or all of such activities. It is submitted that the

sports and pastimes are plainly meant to be a portmanteau phrase to prevent

anybody from arguing whether a particular activity is a sport or pastime. It can

be used for both sports and pastimes. It is submitted that the F&B object of the

Club is not subservient to any other object. It is submitted that the Tribunal

has, without reference to evidence, held that the Club was acting in violation of

its AOA, giving out of turn memberships and misusing of money collected as

membership fees which is unsustainable.

17. As regards the interim relief granted, it is submitted on behalf of Club

that the impugned order is in the nature of a final order and virtually spells

death knell of the Club. The affairs of the Club have been brought to a grinding

halt. It is submitted that the finding recorded by the Tribunal is finding on

merits which could not have been done at the interim stage. Relief has been

granted in the nature of final relief which could not be done at the interim

stage. The impugned order has virtually decided the fate of the Company

Petition. It is submitted that the impugned order is beyond the scope of the

pleadings and grants relief not even prayed for. Nothing remains for

adjudication in the Company Petition as Tribunal has granted more than final

relief. Powers have been delegated to the five members of the sub-committee

which is an abdication of jurisdiction. It is further submitted that there was no 19

urgency in the matter as the Club had been shut since 24th March, 2020 on

account of COVID-19 Pandemic and subsequent lockdowns and there was no

urgency for seeking ex-parte hearing. It is submitted that the petition was filed

on the basis of complaints by disgruntled members who lost in election and

had various other motives. Union of India should not espouse the cause of

disgruntled members. It is lastly submitted that the Company Petition itself

has been filed by way of proxy on behalf of such disgruntled members of the

Club, who had an independent right to complain. It is submitted that the

Central Government is not a competent authority to entertain complaint from

members of the company. The Central Government exceeded its jurisdiction by

entertaining complaints from members for moving the Company Petition. It is

submitted that the Company Appeal (AT) No. 95/2020 deserves to be allowed

and Company Appeal (AT) No. 94/2020 is liable to be dismissed.

18. Per contra, it is submitted by Mr. K.M Natraja, learned ASG representing

Union of India that the proceedings after 31st July, 2019 and the decision

based thereon, including the decision for further inquiry (supplementary

inspection) shows that there has been material as well as application of mind

to the findings therein. Further consideration culminated in order dated

18thMarch, 2020. Thus there has been a formation of an opinion, as

contemplated under Section 241(2) of the Act, 2013. It is submitted that

formation of an opinion is an internal process of the Government which cannot

be called in question in the manner sought to be done by the Club. It is

submitted that the power of the Tribunal in Section 242 is not circumscribed 20

or regulated by the opinion formed under Section 241(2) of the Act, 2013. It is

submitted that there is large public interest involved in the matter. Elaborating

thereupon, Mr. K.M Natraja submitted that the license under Section 8 of the

Act restricts the objects in MOA to promotion of sports and pastimes and such

other objects which are subsidiary, ancillary and incidental functions to

promotion of sports and pastimes. It is submitted that each of the objects are

not severally permitted under Section 8 of the Act. It is further submitted that

the Government land held on lease by the Club for a purpose cannot be

converted into a recreational club for the elite class only. Referring to violation

of Section 8, it is submitted that taking public deposits and distribution of

dividends indirectly, even though prohibited, calls for State action. It is

submitted that the Government has refrained from proceeding under penal

provisions of the Act as it did not intend to curb the sporting spirit of the Club.

Moreover, unjust enrichment and continuous sabotaging of MOA and AOA by

successive Boards warranted action by the Government. It is submitted that

objects of the Club were promotion of commerce, art, science, sports,

education, research, social welfare, religion, charity, protection of environment

or any such other object, which has to be read ejusdem generis. The activity of

the Club registered under Section 8 of the Act has to answer the description of

'useful purpose'. It is submitted that the activities of the Club in serving of

wine, beverages and cigarettes and catering to the elite sections are not 'useful

purpose' and cannot be said to be in accordance with the provisions of Section

8. It is further submitted that Section 8 (1) (c) of the Act prohibits paying of 21

dividend to its members but the Club has been indirectly paying dividend to

the members in kind. The charging of discriminatory fees, in a way provides

dividend indirectly to some of its members in violation of the provisions of the

Act. Learned counsel, while referring to the objects of the Club in its MOA,

submits that promoting sports and pastimes being the first objective or the

purpose, it has to be read disjunctively. Therefore, any activities undertaken by

the Club for 'pastime' should also be related to promotion of sports only.

Moreover, such objects being final, if there is something ultravires in the object

clause of the Club, same would be a good ground to hold that the Club has

declared that it will conduct the affairs in a manner prejudicial to the public

interest. Mr. K.M Natraja, would submit that the Club, initially registered as a

Section 26 company under Companies Act, 1913, cannot carry out recreational

activities divorced from sporting activities at least as its major time functions.

It is pointed out that the Club is spending less than 3% of its total expenditure

towards its major objects while spending over 60% for maintaining the

recreational club. Mr. K.M Natraja would further point out with reference to the

inspection report the complicity of Club in specific criminal offences, therefore,

it is submitted that the violation of the legal restrictions on the Club, which

inhere in each grant, are palpably injurious to public interest. It is submitted

that the grant of a privilege by a largesse by the State has to "best sub-serve

the common good". It cannot be to sub-serve private interests or recreational

purposes of a private groups of individuals. The Central Government would be

lawfully justified in putting in motion the legally prescribed processes to gain 22

control over resources with a view to reform them, as institutions, when any

violation is noticed due to mismanagement of such grants by the grantee. It is

further submitted that when sports facility is taken over by the elite for

recreational purposes and activities of the Club is hit by nepotism or favoritism

despite the Club having been formed on the basis of State largesse, injury to

public interest is involved. It is further submitted that the membership of a

person with a dependent child is in the nature of license to use the Club's

facilities not only for his lifetime but also for his child subject to formality of

filing an application for membership when the child attains age of 21 years and

upon gaining membership by child at any time before his child attains the age

of 21, the facility would be available for such child also and this process

continues ad infinitum. It is submitted that such hereditary enjoyment of State

largesse, for no reason connected to public interest, invites the frown of Article

14 of the Constitution and renders such enjoyment abhorrent to public interest

ad nauseam. This is especially so when the facilities are mostly the recreational

ones rather than for promoting the main objects of the Club viz. sports activity.

It is submitted that some observations, in the nature of obiter dicta, were

invited on account of Club's reference to migrant workers' plight on the road

and even when excluded, the impugned order is not adversely impacted insofar

as the existence of prima facie case is concerned. It is submitted that the

allegations of malafides are unfounded and no specific allegation against any

officer dealing with the matter has been made. It is further submitted that the

question of direct exercise of power attributed to Central Government is out of 23

context as the Central Government has formed opinion and taken action

directly in exercise of its power and not indirectly for any prohibition on its

direct action. It is submitted that the license under Section 8 of the Act

restricts the object in MOA into promotion of sports and pastimes which

cannot be read severally. It is, with reference to inspection reports which

pointed out that majority has been obtained by dubious means and it has

remained confined to few families with majority used to violate MOA and AOA

by acts of continuous sabotage bringing in numbers of their choice by misusing

the provision for voting on addition of new members. The management has

failed to protect the distinctive character of the Club which stands converted

into recreational Club only. As regards violation of lease deed, it is pointed out

that the lease deed was obtained for the benefit of Section 8 Company with

permitted objects and work towards the achievement of such objects. Deviation

from the object vitiates the consent given by the Government. In such

circumstances, the lease itself may not be subsisting. This is also a factor for

filing an application under Sections 241-242 of the Act, 2013. As regards

membership of the Club, it is submitted that membership applications are

invited from the public satisfying certain criteria. Money is collected but no

decision is communicated on the application. Though return of money is

provided for, interest earned thereon is appropriated by the Club. In the given

circumstance, when nepotism and opacity permeate the process, public

interest is involved and government has to step in. It is submitted that the

interim order sought by Union of India was necessary to protect the public 24

interest as also the interest of its members. It is pointed out that the Club did

not file its response before the Tribunal despite availing number of

opportunities. It is further submitted that the illegalities committed by the

Club are evident and there is virtual admission of facts demonstrating

existence of prima facie case in favour of Union of India. Mr. K.M Natraja would

further submit that unless the Central Government is granted the control of

the Company, during the pendency of the Company Petition, continuance of

the GC will result in irreparable injury to the promise of purity and authorized

action under the corporate structure and public interest. Lastly, it is submitted

that the relief sought is preventive in nature. Prejudice to the public interest

has a continuing effect, especially when it is built carefully on the strength of

misrepresentations and false promises over a period of half a century, as

admitted by private Respondents. It is submitted that the Union of India has

carved out a strong case supported by documentary evidence entitling it to the

interim reliefs as sought by it in Company Petition viz. appointment of an

Administrator as a preventive measure against further prejudice to public

interest in the affairs of the Club. In addition to the prejudice, it is submitted

that the application by some of the other Respondents as also the findings of

the inspection reports clearly indicate that the activities of the Club are being

carried out prejudicial to the interest of its members as also prejudicial to the

interests of the company. Reference in this regard is made to application filed

by Respondent No.18 alleging gross nature of the illegalities in conducting the

affairs of the Club. Union of India, thus defends the impugned order while 25

demonstrating that the interim relief is inadequate and prays for appointment

of Administrator.

19. Heard learned counsel for the parties at great length and accorded

consideration to the submissions made at the Bar. The two appeals, one

preferred by the Union of India assailing the impugned order only to the extent

of relief granted as being inadequate and the other appeal preferred by the

Club assailing legality and correctness of the impugned order, common to both

appeals, were heard together. Before dealing with the issues raised in these

appeals, it would be appropriate to have a conspectus of the provision

governing grant of interim relief under Section 242(4) of the Act, 2013 and the

scope of appeal preferred against an order passed in exercise of powers under

Section 242(4) of the Act, 2013. This Appellate Tribunal, while dealing with the

issue in "Smt. Smruti Shreyans Shah vs. The Lok Prakashan Limited-

Company Appeal (AT) No. 25 of 2018 (decided on 5th September, 2019)"

observed as under:

"15. Now coming to the issue of grant of interim relief, be it noticed that Section 241 of the Act dealing with grant of relief in cases of oppression and mismanagement provides that any member of a company, eligible in terms of Section 244 of the Act, may apply before the Tribunal for an order under Chapter XIV dealing with prevention of oppression and mismanagement. Such member's complaint must be in regard to the affairs of the Company that have been or are being conducted in a manner prejudicial to public interest or 26

in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company or that any material change has taken place in the management or control of the company and because of such change it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members. Section 241(2) of the Act enables the Central Government also to apply to the Tribunal for an order under Chapter XIV of the Act, if in its opinion the affairs of the Company are being conducted in a manner prejudicial to public interest. Section 242 of the Act dealing with the powers of the Tribunal empowers it to pass such order as it thinks fit if, based on application filed under Section 241 it is of opinion that the company's affairs have been or are being conducted in a manner prejudicial or oppressive to any member(s) or prejudicial to public interest or in any manner prejudicial to the interests of the company and on just and equitable ground winding up order would be justified but such winding up would unfairly prejudice such member(s). Sub- section (2) of Section 242 deals with the nature of substantive relief that can be granted though same is only illustrative and not exhaustive. Section 242(4) of the Act provides for interim relief which the Tribunal may grant for regulating the conduct of the company's affairs. Such interim relief can be granted by virtue of an order passed on the application of any party to the proceeding and such order can be subjected to terms and conditions which appear to the Tribunal to be just and equitable. On a plain reading of these provisions, it is abundantly clear that pending consideration of application by a member or 27

member(s) of a Company alleging oppression or mismanagement, the Tribunal is vested with wide discretion to make any interim order on the application of any party to the proceedings, which it thinks fit for regulating the conduct of company's affairs. Such interim order can be subjected to terms and conditions which appear to the Tribunal to be just and equitable. The nature of interim order would depend upon the nature of complaint alleging oppression or mismanagement and the relief claimed therein. A member alleging that the affairs of the company have been or are being conducted in a manner prejudicial or oppressive to him or any other member or prejudicial to the interests of the company must come up with specific allegations of oppression and mismanagement and demonstrate that the affairs of the company have been or are being run in a manner which jeopardizes his interests or interests of other members or the interests of the company. Passing of interim order necessarily correlates to regulating the conduct of company's affairs. It is therefore imperative that the member complaining of oppression or mismanagement makes out a prima facie case warranting grant of relief in the nature of an interim order. The making of an interim order by the Tribunal across the ambit of Section 242 (4) postulates a situation where the affairs of the company have not been or are not being conducted in accordance with the provisions of law and the Articles of Association. For carving out a prima facie case, the member alleging oppression and mismanagement has to demonstrate that he has raised fair questions in the Company Petition which require probe. Fairness of questions depends on the nature of allegations which, if proved, would entitle the member complaining of 28

oppression and mismanagement to final relief in terms of provisions of Section 242."

20. It is indisputable that an order granting interim relief in terms of

provision of Section 242(4) of the Act, 2013 is appealable. The scope of such

appeal, however, is limited as there are no findings of fact recorded by the

Tribunal in a regular trial in the Company Petition. This Appellate Tribunal,

while sitting in appeal against grant of interim relief would be within its

province to ascertain whether the Tribunal was right in recording the prima

facie satisfaction on the basis of material on record. To put it otherwise, this

Appellate Tribunal would be acting within its jurisdiction to consider whether

the finding or conclusion in regard to existence of prima facie case has been

reached on consideration of relevant material and if it is so, whether such

finding is justified. The impugned order cannot be set aside without examining

the material on record and recording a contrary finding qua the existence of a

prima facie case. Examination of material relied upon for grant of interim relief

being inevitable in the instant case, it has to be borne in mind that this

Appellate Tribunal would be loath in interfering with the finding unless it is

demonstrated that the view taken by the Tribunal is capricious or

unreasonable and not merely because other view is possible. However, before

examining the legality and correctness of the impugned order in the context of

existence of a prima facie case for relief made out in the Company Petition filed

by Union of India before the Tribunal, it would be appropriate to come to grips

with formation of opinion by the Central Government in regard to the affairs of 29

the Club being conducted in a manner prejudicial to public interest. Section

241(2) of the Act, 2013 reads as under:

"241. Application to Tribunal for relief in cases of oppression, etc.-.............(2) The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter."

21. On a plain reading of the provisions engrafted in Section 241, it comes to

fore that while any member of a Company complaining of affairs of company

being conducted in a manner prejudicial to public interest or in a manner

prejudicial or oppressive to him or any other member or members or in a

manner prejudicial to the interests of the company is entitled to apply to the

Tribunal for relief, subject to its entitlement under Section 244, the Central

Government is empowered to apply to the Tribunal for relief in case of

mismanagement only if the affairs of the company are being conducted in a

manner prejudicial to public interest. The Central Government is required to

record its opinion as regards affairs of the company being conducted in a

manner prejudicial to public interest. Recording of such opinion is a sine qua

non for applying to the Tribunal under Section 241(2). The first issue

confronting this Appellate Tribunal would be whether there is formation of

opinion on the part of Central Government in regard to the affairs of the Club 30

being conducted in a manner prejudicial to public interest. This would require

briefly going into the genesis qua formation of the Club, its activities as

delineated by its MOA & AOA, the objects sought to be pursued by the Club,

handling of its affairs including its assets and funds besides regulating the

entry and exit of its members.

Formation of opinion by the Central Government in regard to affairs of

Club being conducted in a manner prejudicial to public interest:

22. While contending the Club appears to have raised issue that the sanction

dated 18th March, 2020 does not constitute an opinion within the meaning of

Section 241(2) of the Act, 2013, it is submitted that the petition before the

Tribunal was bad for want of formation of opinion by the Central Government

and in the event of the Tribunal being of the view that there was formation of

an opinion, the petition was not maintainable for want of a valid opinion as

such opinion suffered from non-application of mind. While it is not disputed

that the Tribunal has shown its awareness in regard to raising of issue, the

Club is aggrieved of the impugned order on the score that while it does not

address the issue of formation of opinion, it casually deals with the issue

relating to non-maintainability of petition for want of any valid opinion. Before

leaping forward, we deem it appropriate to point out that the issue of

maintainability of petition could not have been raised as an issue for

determination at the threshold stage and within the narrow scope of

application for grant of interim relief under Section 242(4) unless it was the 31

case of the Club that the petition or the remedy claimed therein was barred by

law or that the Tribunal lacked jurisdiction to deal with the petition. Whether

the petition raised a fair question requiring a probe at the inquiry was the only

consideration required to be present to the mind of the Tribunal while

considering grant of interim relief. It is not the case of the Club that the

Company Petition filed by Union of India or the remedy claimed therein was

barred by law or that the Tribunal lacked jurisdiction to take cognizance. This

being the position, the only issue required to be dealt with by the Tribunal was

in regard to formation of opinion by the Central Government which admittedly

is a sine qua non for grant of interim relief in a petition filed by the Central

Government alleging affairs of the Club being conducted in a manner

prejudicial to public interest.

23. According to learned counsel representing the Club, there is complete

non-application of mind by the Central Government in filing the petition, it

being submitted that no material has been produced to establish that the

Central Government have formed a valid opinion under Section 241(2) of the

Act, 2013. As regards letter dated 18th March, 2020, it is submitted that the

same is not an opinion and same does not reflect any application of mind. It is

contended on behalf of the Club that the standard of proof on the basis of

which satisfaction has been arrived at by the Central Government must be

such that would ordinarily satisfy an unprejudiced mind objectively and not

subjectively. The Club would further argue that the opinion has to be formed

on the basis of material as the validity and existence of opinion is not excluded 32

from judicial review. The opinion has to pass the muster of judicial scrutiny.

This argument is countered by the Union of India submitting that the

proceedings after 31st July, 2019, the decision based thereon which included

the decision to cause a supplementary inspection to be conducted clearly

demonstrate that there was material as also application of mind to arrive at the

conclusion which is supplemented by the fact that further consideration was

accorded which culminated in order dated 18th March, 2020. It is submitted

that formation of opinion is an internal process of the Government and cannot

be called in question in the manner sought to be done by the Club.

24. It cannot be disputed that the opinion in regard to affairs of the Club

being conducted in a manner prejudicial to public interest has to be based on

material and its consideration in the context of involvement of public interest

besides disclosing as to how the management of the Club was being conducted

in a manner prejudicial to public interest. Formation of such opinion is not an

idle formality. It is in the nature of arriving at a judgment based on the

material with the object of taking action. The Club has taken serious exception

to the observations made in regard to such formation of opinion on the part of

the Central Government and its validity in para 63 of the impugned order

which is reproduced hereinbelow:

"63. With regard to formation of opinion, in Governments, one person can't do everything right from inspection to formation of opinion, it goes from one table to another in step wise functioning, when it comes to the highest official, 33

he will examine summation and supporting documents to ascertain whether prejudice is being caused to public interest, moreover Government has to discharge various functions, this formation of opinion is one among many works, of course for club, it is the only work. For this is not anybody's personal job, it is to be assumed Government will remain impersonal, unless it is shown that certain officer has personally done something against somebody to settle personal score. No such material before this Bench. To elaborate this logic, the State has relied upon Gullapalli Nageswara Rao V. APSRTC (AIR 1959 SC 308), to say that when facts are available to arrive to an opinion, it is sufficient to proceed further. In this case, no doubt supplementary report dated 03.03.2020 runs into 5000 pages, but whereas main report prepared basing on supplementary report is of only 100 pages, upon which the Central government along with the assistance of its team, formed an opinion, which cannot be denied. The bottom line is whether material is there or not. Here the material is very much present to the satisfaction of the authority, it is a subjective satisfaction based on the material available, if opinion is based on the material, as to sufficiency, it is not in the realm of the court. But in this case, material available is clearly indicating mess is created in the club affairs causing prejudice to the public interest, therefore there is no merit in saying that filing is not based an opinion demonstrating reasons."

25. In the instant case, it is not in controversy that the order dated 16th

March, 2016 came to be passed by the Ministry of Corporate Affairs for 34

inspection of the Club in terms of powers conferred under Section 206(5) of the

Act, 2013. This order came to be passed upon receipt of complaints against the

Club which, inter alia alleged ineligibility of 'M/s. S.N. Dhawan and Company'

for appointment as Statutory Auditors of Club, irregularities in the

management of the Club, demand by the Club for revision of registration fee

with retrospective effect from some individuals etc. It is also not in dispute that

the Inspectors held inspection from January, 2019 to July, 2019 for F.Y. 2012-

13 to 2017-18, in respect whereof report was laid before the Regional Director

(Northern Region) of Ministry of Corporate Affairs, who placed the same before

the Central Government on 5th August, 2019. The inspection report pointed out

violations which are set out in para 9 of the impugned order reproduced herein

below:

"9. The violations borne out from the inspection report are as follows:

(i) Violation of Section 58A of the Companies Act, 1956 read with Companies (Acceptance of Deposit) Rules, 1975 along with Section 74 and Section 76 of the Companies Act, 2013 read with Companies (Acceptance of Deposit) Rules, 2014;

(ii) Violation of provisions of Section 5, 166 and 179 of the Companies Act, 2013 and mismanagement of funds received by way of registration fee from the applicants;

(iii) Violation of provisions of Section 129, 166 and 179 of the Companies Act, 2013 due to mismanagement of 35

company's funds as per qualified opinion of Auditor's Report for the financial year 2017-18;

(iv) Violation of provisions of Section 209 and 211 of the Companies Act, 1956 along with violation of Section 128 and 129 of the Companies Act, 2013 and mismanagement of funds received by way of registration fee from the applicants; (v) Violation of Section 141 of the Companies Act, 2013; (vi) Misstatement in the e-forms-action under Section 628 of the Companies Act, 1956; (vii) Violation of Section 129 read with Schedule-III and Section 448 of the Companies Act, 2013; (viii) Anomaly in the number of members of the company, liable for action under section 628 of the Companies Act, 1956; (ix) False statement in the balance sheet as at 31.03.2013, liable for action under section 628 of the Companies Act, 1956; (x) Violation of Section 5 of the Companies Act, 2013; (xi) Violations of provisions of Sections 211(1) and 211(2) of the Companies Act, 1956; (xii) Violation of provisions of Sections 209 and 211 of the Companies Act, 1956 and the provisions of Sections 128 and 129 of the Companies Act, 2013 along with mismanagement of funds received by way of registration fee from the applicants; (xiii) Violation of provisions of Section 226 of the Companies Act, 1956; (xiv) Violation of Section 129 of the Companies Act, 2013; (xv) Financial irregularities, liable for violation of Section 134(3) (i) of the Companies Act, 2013; 36

(xvi) Violation of provisions of Section 134 of the Companies Act, 2013;

(xvii) Violation of Sections 128, 129 read with AS-10 of the Companies Act, 2013;

(xviii) Violation of provisions of Section 217(3) of the Companies Act, 1956;

(xix) Violation of provisions of Section 209(1) of the Companies Act, 1956; and (xx) Revocation of license under Section 8(6) of the Companies Act, 2013."

26. The Ministry of Corporate Affairs, on consideration of the Inspection

Report directed taking of penal action against the Club management, Auditors

of the Club which included removal of management and appointment of

Government directors with further provision for supplementary inspection for

dealing with the issues pertaining to allotment of membership, funds raised

from new aspirants as registration fees for membership, accounting treatment

of the amount received from such funds, investments made by the Club out of

such amount as also processing charges received from the aspiring candidates

for membership. Report dated 31st July, 2019 came to be placed before

Ministry of Housing and Urban Affairs with a view to initiate necessary action

against the Club. A direction was given to the Inspectors who submitted the

Supplementary Inspection Report dated 3rd March, 2020 to the Regional

Director. Same was placed before the Ministry of Corporate Affairs on 4th

March, 2020. This Report elaborately dealt with the numerous violations and 37

mismanagement of the affairs of the Club. It also brought to fore that the

actions of the committee acting in brazen violation of Articles of Association

and statutory provisions, seriously jeopardized public interest. The Report

pointed out that the GC members had been acting in a manner to confer

benefit on chosen members of the Club at the expense of general public. It is

upon consideration of such material that the Central Government directed

initiation of action culminating in filing of the Company Petition under Section

241(2) of the Act, 2013. Viewed in this factual background, it is futile on the

part of Club to contend that there was no material before the Central

Government for formation of opinion with regard to the affairs of Club being

conducted in a manner prejudicial to public interest. The very fact that the first

Inspection Report manifesting in taking of penal action was followed by further

probe by the Inspectors leading to a more elaborate exercise and then upon the

report being laid before the Central Government, action was directed to be

taken would leave no room for doubt that there was application of mind.

27. The Hon'ble Apex Court, in "63 Moons Technologies Ltd. & Ors. v.

Union of India (2019) SCC OnLine SC 624" while dealing with formation of

opinion by the Government in regard to prejudice being caused to public

interest clearly laid down that the opinion of the Government is not subject to

objective test. It was emphasized that the only requirement was that there

must be factual material for arriving upon such opinion. The reasons which

weighed with the Government for arriving at such opinion are not subject of

judicial review as regards sufficiency of those reasons.

38

28. The factum of application of mind in regard to formation of opinion

cannot be proved through any mode other than the material before the

Competent Authority and the action directed to be taken on the basis of same

after having taken notice of it. The penultimate action manifesting in filing of

Company Petition under Section 241(2) of the Act, 2013 as a sequel to the

action taken on the basis of the Inspection Reports and conclusion of the probe

would not permit of any hypothesis other than the one compatible only with

application of mind by the authority in regard to formation of opinion on the

basis of material placed before it which comprised of the Inspection Reports

and the conclusion of probe establishing gross violations and brazen exercise

of authority by GC members to the detriment of general public interest. The

forming of an opinion in regard to affairs of the Club being conducted in a

manner prejudicial to public interest would not be based on satisfaction as

contended on behalf of the Club. Such formation of opinion cannot be called in

question. The Tribunal would not be acting within its province to evaluate or

sift the material placed before the Central Government and arrive at a different

conclusion. Such an exercise would be impermissible as the task of formation

of an opinion in regard to the conduct of affairs of company being prejudicial to

public interest is not in the nature of an order required to be passed by the

Central Government as a statutory authority for purposes of discharge of any

statutory duty like in a case of amalgamation/ merger of Companies but

merely for the purpose of enabling it to apply to the Tribunal for an order

under Chapter XVI of the Act, 2013. While a member of a Company is entitled 39

to complain that the affairs of Company are being conducted in a manner

prejudicial to public interest, the Central Government can file a petition under

Section 241/242 of the Act, 2013 only after forming an opinion qua affairs of

Company being conducted in a manner prejudicial to public interest. The letter

dated 18th March, 2020 addressed to Regional Director speaks of the

Competent Authority having addressed the issue raised in letter dated 4th

March, 2020 by the Assistant Director which is referable to the Inspection

Reports referred to elsewhere in this judgment and clear direction, inter alia, to

take necessary steps for filing petition under Sections 241 & 242 of the Act,

2013 and takeover management, control of the Company in public interest by

the Government of India. The letter is reproduced herein below: 40

29. On a plain reading of the letter, it is clear that the Competent Authority

has perused the material including the Inspection Reports and it is only upon

consideration of such material that directions were given to file petition and

take further action as spelt out in the letter. From the nature and character of

directions given to Joint Director, it is unambiguously clear that the Competent

Authority has applied its mind to the complaints and Inspection Reports. This

is clearly gatherable from the directions which include filing of petition under

Section 241/242 of the Act, 2013.

30. Sufficiency or otherwise of material for coming to such conclusion would

not be subject of review by the Tribunal, more so when no malafides are

attributed to Central Government which admittedly has not acted on its own

motion but on the basis of complaints pouring in alleging gross irregularities

including declining of membership to the aspiring candidates whose funds

were allegedly utilized for the benefit of few chosen members, albeit with the

blessings of the GC.

41

We find no merit in the issue raised. Arguments advanced on this score

are accordingly repelled.

Existence of a prima facie case

31. Coming to the vital aspect of existence of a prima facie case warranting

grant of interim relief be it seen that for demonstrating that a fair question has

been agitated by Union of India involving public interest reference to the

factual aspects would be inevitable. The chronology of dates and events from

inception of the Club with its incorporation in 1913 as a Company limited by

guarantee under the Companies Act, 1913 with nomenclature of Imperial Delhi

Gymkhana Club Ltd. and the legacy that followed landing the Club in a

situation where its functioning in conformity with law and the Articles of

Association was questioned by alleging gross abuse of powers and

mismanagement has been detailed in the impugned order and we don't intend

to burden this judgment by reiterating the same except to the extent of

demonstrating of existence of prima facie case for interim relief claimed by the

Union of India. Land admeasuring slightly above 27 acres situated on

Safdarjung Road came to be allotted to the Club in the nature of perpetual

lease by the Government. It happened in 1928. The main objective of the club,

as envisaged in its MOA and AOA was to promote sports and pastimes and

other objectives within the legal and regulatory framework. Several complaints

alleging mismanagement, irregularities, misuse of funds, fudging of financial 42

statements etc. were lodged with the Central Government against the

management of Club prompting the Central Government to order an inspection

for the period covering Financial Years 2012-13 to 2017-18. The inspection

came to be conducted between January to July, 2019. The inspection report

dated 31st July, 2019 came to be submitted to Central Government which

revealed several violations qua management of funds and fabrication of

financial documents and balance statements. It emerges from record that upon

consideration of this inspection report, Central Government directed lodging of

prosecution against the company for statutory violations besides filing of

petition under Sections 241-242 of the Act, 2013. Government also directed a

supplementary inspection to be carried out in regard to the affairs of the

company. The supplementary inspection report dated 3rd March, 2020 while

confirming the violations reported in earlier inspection report further revealed

that the financial statements of the company were fabricated to depict a rosy

picture in regard to the affairs of the company which was far from truth. It

indicated manipulation of records and registers, deviation by the officers of

Club from the Articles of Association, mismanagement of the affairs of Club

and the GC acting in utter disregard to the Articles of Association and the

provisions of the Act imperiling the public interest and the GC members acting

in a manner that would confer benefit on chosen members of the Club in a

hereditary manner at the expense of general public. The Company Petition,

filed on the basis of the inspection report brings to fore gross violation of

provisions of the Act and deviation from the Articles of Association. It projects 43

the violations of serious nature, misuse of funds, exclusion of general public,

fraudulent conduct of the management, the inherently arbitrary mechanism

adopted in regard to criteria for selection and voting for membership. There are

allegations in the Company Petition that the funds collected from non-members

were utilized for unjust enrichment and undue enjoyment/ wrongful gain of

the existing members and other users of the Club and solely for promoting the

benefit of existing members. The selection process was alleged to be dubious

and shrouded in mystery. The petition would further allege violations and non-

adherence to the statutory and AOA provisions primarily in two areas;

(i) differential treatment in allotment of memberships; and

(ii) lack of transparency in annual financial statements.

32. The spat of allegations are manifold but it would be appropriate to quote

a few instances in this regard. It is alleged that the GC induced the prospective

members/applicants to pay higher membership fees which was enhanced from

time to time despite the GC members being aware of the fact that the average

vacancy rate of the Club membership per annum ranged between 120 to 135

and from 1972 onwards there was a long waiting list. Further that the Club

had a waiting list for the non-government category for a period of about 37

years. It is alleged that the action of culling out and giving the proportion

meant for non-government category to the category of UCPs (use of club

premises) in the new category of wait list thus, ex facie and unlawful way of

inducting permanent members. The petition further alleged that the Club was 44

manipulating the creation of categories of membership only to ensure that

certain individuals and children of existing members are accommodated by

excluding the general public. In regard to charging of fee from different

categories for membership the Club is alleged to be acting contrary to the

provisions in Articles of Association. It was alleged that during the last five

fiscals the Club has consistently failed to carry out the objects of the Club.

Allegedly 30.34% of the total expenditure of the Club has been incurred

towards catering consumables, wine, beverages and cigarette. Registration fees

has been increased and more categories of members have been added contrary

to the provisions of Articles of Association which is alleged to be falling within

the purview of fraud. It was alleged that the Club had been collecting

intractably increasing application money under self-devised unauthorized

heads contrary to the Articles of Association. It was alleged that such

enhancement, even with retrospective effect was never approved by the AGM or

EGM of the Club. As regards the alleged dubious financial activities of the

Club, it was alleged that the interest accrued over the registration fee from new

applicants has been utilized for the benefits of existing permanent members,

green card holders, UPC members etc. benefiting them by utilizing facilities at

subsidized rates. Thus, it is alleged that the Club has been illegally distributing

the dividend in kind amongst its members.

33. On consideration of the application for grant of interim relief when the

Company Petition was pending consideration, the Tribunal, while dealing with

formation of opinion by Central Government in regard to acts complained of 45

being prejudicial to public interest and affairs of Club being conducted in a

manner prejudicial to public interest dwelling upon the existence of a prima

facie case in regard to alleged mismanagement observed as under:-

"62. It is a case saying Section-8 Company, running on Government owned land, is run by a coterie of people bringing in the children of permanent members and children's children for using facilities of the club despite several members remaining outside for decades together, when Government Officer retires taking him into private members quota, and using crores of rupees collected from waitlist members as its own money, and using public property of 27 acres of land in the Lutyen's Delhi adjacent to Prime Minister residence worth of thousands of crores on minimal annual rent of Rs.1000 annual rent for lazing around in the evening for drinking amounts to prejudice to the public interest, all these are born out from the records, of course any interpretation could be given, but they cannot deny the fact that the club is basically for pastimes, in fact it is the case of the Respondent Club and its GC. To say public interest is involved, whole country public is not required to be effected; public interest is involved where actions of somebody will prejudice the public of that vicinity or a class of people. The members remain waiting years together for membership is nothing but causing prejudice to the public, when some are in waiting, some getting entry prior to others in waiting is prejudice to the public, some persons alone enjoying the state property is also prejudice to the public.

63. With regard to formation of opinion, in Governments, one person can't do everything right from inspection to formation of opinion, it goes from one table to another in step wise functioning, when it comes to the highest official, he will examine summation and supporting documents to ascertain whether prejudice is being caused to public interest, moreover Government has to discharge various functions, this formation of opinion is one among many works, of course for club, it is the only work. For this is not anybody's personal job, it is to be 46

assumed Government will remain impersonal, unless it is shown that certain officer has personally done something against somebody to settle personal score. No such material before this Bench. To elaborate this logic, the State has relied upon Gullapalli Nageswara Rao v. APSRTC (AIR 1959 SC 308), to say that when facts are available to arrive to an opinion, it is sufficient to proceed further. In this case, no doubt supplementary report dated 03.03.2020 runs into 5000 pages, but whereas main report prepared basing on supplementary report is of only 100 pages upon which the Central Government along with the assistance of its team, formed an opinion, which cannot be denied. The bottom line is whether material is there or not. Here the material is very much present to the satisfaction of the authority, it is a subjective satisfaction based on the material available, if opinion is based on the material, as to sufficiency, it is not in the realm of the court. But in this case, material available is clearly indicating mess is created in the club affairs causing prejudice to the public interest, therefore there is no merit in saying that filing is not based an opinion demonstrating reasons.

xxx xxx xxx

74. This Tribunal having already held that the affairs of the Club are prejudicial to the public interest, now on putting the facts available to the scrutiny under section 242(1), it is perceived that if Government for any reason taken back the land leased out to the Club, then once the substratum is gone, the Club has to be wound up, or if action is taken under Section-8 then also it would become problem to the club, therefore to avoid such kind of situation, an interim arrangement is devised to resolve the issues afflicting the Club.

75. For the reasons aforementioned, I have found prima facie case demonstrating that the affairs of the Club are being conducted in a manner prejudicial to the public interest therefore I hereby direct Union of India to appoint two of its nominees of its choice as Members in the General Committee to monitor the affairs of the Club along with other GC Members and give suggestions to the GC, and direct the Union of India to constitute a Special Committee with five Members of its choice to enquire into the affairs of the Club, utility of the land leased out by 47

the State, with regard to constructions in progress without requisite approvals or with approvals, suggestions for changes in Articles and Memorandum of Association, membership issues including waitlist and about accelerated membership, adherence of the Club to the Rules governed by Section 8 of the Companies Act 2013 and other miscellaneous issues if any and file report of recommendations suggesting for better use of the club premises for the larger good in a transparent manner on equity basis within two months hereof."

34. The finding recorded by the Tribunal has been seriously questioned,

contending that no element of public interest was made out in the petition.

Learned counsel for the Club submitted that the petition does not concern the

welfare of public as a whole, affairs of the Club do not concern citizens

generally, the public as a whole does not have any peculiar interest affecting

their legal rights nor is economic welfare of the public involved. This argument,

though appears to be attractive in technique, lacks substance. While it may be

true that the mere fact of the Club carrying out its activities on the allotted

land in regard to which it has perpetual lease hold rights, would not involve

public interest as the conferment of such rights on the Club or for the

purposes of Club whose activities may include banquette, concerts, dances as

also lodging and boarding of its members in addition to its users for any

purpose for which the same was customarily used would be lawful, the user in

deviation of its laid down objective, coming in conflict with the legal framework,

enhancing the membership fee, holding of the money of prospective candidates

for membership, utilization of the interest component of such respective

candidates waiting in queue for the exclusive benefit of indulgence in 48

pleasurable activities of permanent members, their dependents and users

would definitely bring in public interest though it may not be all encompassing.

The interest of society at large or public interest cannot be stretched too far as

to include whole lot of Indian citizens. It would suffice if the rights, security,

economic welfare, health and safety of even a section of the society like the

candidates seeking membership from the category of common citizen are

affected notwithstanding the fact that they are only a few individuals. Public

interest cannot be construed as enmasse interest of all citizens. Where interest

of a component of general citizenry of any age group, gender or belonging to

any strata of society is affected as a class, apart from the legal rights of

individuals, public interest can safely be said to be involved.

35. While dealing with expression 'in a manner prejudicial to public interest',

their lordship of the Hon'ble Apex Court in "State of Bihar v. Kameshwar

Singh reported in AIR 1952 SC 252" observed as under:

"...........In the case of a company intended to operate in a modern welfare State, the concept of public interest takes the company outside the conventional sphere of being a concern in which the shareholders alone are interested. It emphasizes the idea of the company functioning for the public good or general welfare of the community, at any rate, not in a manner detrimental to the public good."

36. The Hon'ble Apex Court so aptly observed in "Krishan Lal Gera v. State

of Haryana& Ors.-(2011) 10 SCC 529" as under:

"28. If a chunk of a Government stadium, being prime land in the heart of the city meant for developing sports and 49

athletics is misused or illegally allowed to go into private hands, it cannot be said that no public interest is involved. While the High Courts are not expected to take policy decisions in regard to sports administration and infrastructure, nor expected to supervise the running of the sports stadia, they are bound to interfere and protect public interest when blatant misuse is brought to their notice. The High Court should direct the concerned authorities to perform their duties and take action in regard to the irregularities, omissions and negligence, so that the interest of the public, particularly human resources development, could be protected."

37. It is abundantly clear that misuse of the Club meant for pastime and

sports activities and denying access of membership even after accepting the

enhanced membership fee and putting them in queue for decades together with

utilization of the component of interest admissible on their invested

membership fee for the benefit of permanent members and users seriously

jeopardized interest of such prospective members and involved public interest.

That apart, the interests of general public seeking membership but being made

to wait for decades together with membership fee being held up and its interest

component being utilized for the recreational and pleasurable activities of

permanent members and users of the Club despite the Club being aware of the

limited number of vacancies in membership occurring every year would be a

predominant consideration concerning the rights of general public to gain

access and seek membership of the Club, thus involving public interest.

38. In order to determine whether a prima facie case exists qua infraction of

the AoA and MoA referable to the objects of the company be it seen that the 50

objects of the company, as enumerated in the object clause of the Club's MoA

are:

"(i) to promote polo, hunting, racing, tennis and other games, athletic

sports and pastimes;

(ii) to provide courses and grounds at Delhi or elsewhere and to layout,

prepare and maintain the same for the purposes of the company and to

provide club houses, pavilions, lavatories, kitchens, refreshment rooms,

workshops, stables, sheds and other conveniences in connection

therewith and to furnish and maintain the same and the permit the same

and the property of the company to be used by members and other

persons either gratuitously or for payment."

39. There is considerable force in the argument advanced by Mr. K. M.

Nataraja, learned counsel for Union of India that promoting sports and

pastimes has to be read disjunctively and any activities undertaken by the

Club for pastimes must be relatable to promotion of sports only. Promotion of

sports being the primary object of the Club, would not permit of any activity in

the nature of pastime to be conducted unless the same bears nexus with the

sports activity. Therefore, the Club would not be operating within its province

of activities by merely concentrating on recreational activities or pursuing the

same as its major objective since the Club was constituted as a company

registered under Section 26 of the Companies Act, 1913 and reference in

perpetual lease deed to activities of the Club have to be interpreted as activities 51

concerning the objects for which the company was formed. During the course

of arguments, learned counsel for the Union of India vehemently stressed that

barely 3% of total expenditure was being incurred by the Club towards sports

activity and more than 60% was being spent on maintaining the recreational

Club. He has also referred to the Inspection Report which unfolds specific acts

of omission and commission attributed to the Club and would submit that the

violation of the restrictions imposed by law, in the context of enjoyment of lease

hold rights by the Club, are palpably injurious to public interest.

40. We now proceed to examine how public interest has been interpreted

judicially. Learned counsel for Union of India relied upon "J.S. Luthra

Academy v. State of Jammu and Kashmir- (2018) 18 SCC 65" which

clearly lays down that the State has no authority to grant a largesse with the

object of sub-serving private interests or recreational purposes of a private

group of individuals. The Honble Apex Court observed that when violation by

the grantee is noticed, it would be lawful for the Government to initiate such

legal process as may be prescribed to gain control over such resources with a

view to reform them, as institutions, rather than do a patch-work on piecemeal

basis. With reference to "Krishan Lal Gera v. State of Haryana- (2011) 10

SCC 529", it is submitted that when the prime object of sports facility is taken

over by the elite for recreational purposes and activities of the Company are hit

by nepotism and favoritism while the Company was formed on the basis of

State largesse, there was an injury to public interest. Largesse by the State

cannot be said to be intended for enjoyment or use by highly placed individuals 52

only. The Constitution of India sets the goal of a Welfare State and

establishment of an egalitarian society where the citizens are not discriminated

on the basis of region, religion, caste, language, race or social strata. The Club

has been perusing a policy under which membership of a person with a

dependent child clothes him with the right to use the Club's facilities for his

lifetime as also for his child subject to a formality of applying for membership

when the child attains the age of 21 years and upon such child gaining

membership before his child is 21 years old viz. the grand child of the basic

member, the facility would be available for such child also with the process

continuing ad infinitium. Such enjoyment of State largesse partaking of a

hereditary character cannot be said to be promoting public interest. It would

rather fall foul of Article 14 of the Constitution of India rendering such

enjoyment abhorrent to public interest ad nauseum.

41. Prima facie it appears that there is violation of the restrictions as regards

objects in MOA and AOA and the Government's land given on perpetual lease

primarily for sports related activity has been converted into recreational Club

for a chosen few with doors virtually shut for an aspirant belonging to the

common stock. Under the garb of distinctive character of the Club which is a

relic of the Imperial past, the doors for membership are virtually limited to

people having blue blood in their veins thereby perpetrating apartheid and

shattering the most cherished Constitutional goal of securing social justice and

equality of status and opportunity.

53

42. We are conscious of the fact that the Tribunal has made some

observations expressing its opinion in respect of certain socio-economic issues

which were unnecessary and could have been avoided. Such observations were

made with reference to some contemporary events that happened during the

lockdown period imposed after outbreak of COVID-19 Pandemic which have no

bearing on the outcome of the application before the Tribunal and the Tribunal

has stated in the impugned order that these considerations have not influenced

its findings and the directions passed in the impugned order. It is irrelevant

whether such observations depicting the personal philosophy and thought

process of the Hon'ble Members comprising the Bench came as a rebuff to the

argument advanced by the Club on the aspect of public interest or were simply

reflection of the mind of Court in regard to the goal of social and economic

justice sought to be achieved as set out in the Preamble of the Constitution. Be

that as it may, such observations have not been allowed to influence the

decision and in appeal we have not at all taken into consideration such

observations to ensure that the finding in regard to existence of prima facie

case for grant of relief remains purely within the realm of legal considerations.

43. As regards the plea of colorable exercise of power raised against Union of

India, be it seen that there is no specific allegation against any officer and the

question is irrelevant as Central Government would be acting within its

province to apply to the Tribunal for an order under Chapter XVI of the Act,

2013 when it is of the opinion that the affairs of the Company (Club) are being

conducted in a manner prejudicial to public interest. This action of applying to 54

the Tribunal is a legally vested right in the Central Government which can be

directly exercised. It is absurd to say that formation of opinion in regard to

existence of affairs of the company being conducted in a manner prejudicial to

public interest is beyond the power of the Central Government and exercise of

such power would be a colorable exercise of power.

44. It has been noticed that the mechanism adopted in ensuring that the

membership stays tied up and confined to a close group with an ordinary

aspirant waiting for decades in queue with disappointment staring in his/ her

face and the membership fee garnering interest for the benefit of existing

members is in blatant violation of AOA and MOA. The Company having been

virtually converted into recreational Club relegating the prime object of sports

activity to the back burner has the effect of destroying its distinguished

character as envisaged at the inception. The company, initially registered as

Section 8 Company with specific objects related to sports and pastimes,

obtained land on lease from the Government but over a period of time slightly

started drifting away and deviated from the permitted objects which may also

impact subsistence of lease depending on the degree of violation and deviation.

The Inspection Report dated 31st July, 2019, directions of Ministry of Corporate

Affairs dated 13th September, 2019 and the Supplementary Inspection Report

dated 3rd March, 2020 placed on the record of the Tribunal, besides

innumerable irregularities, reveal that various construction activities have been

undertaken in the Club premises either without obtaining the necessary

approval or in deviation of the approved plan thereby converting the land use 55

and frustrating the prime object of the Club. It is in reply Affidavit of the Club

that the waitlisted applicants paid Rs.44.79 Crores till 2017-18 as fee for

seeking membership with disappointment staring in their faces. The approval

of draft refund letter at page 350/351 of Volume II of the convenience

compilation clearly bears out the remark of the Club 'we are positively in

trouble'. This is prima facie indication of irregularities being indulged in by the

Club. However, that would be the subject of probe during inquiry and this is

not the stage to record any finding on that aspect. The stand taken by

Respondent No.18 would corroborate some of the allegations in the Company

Petition. The considerations which must be present to the mind of Tribunal at

the conclusion of the Inquiry while recording the finding that the acts of

oppression and mismanagement complained of are of a degree warranting

winding up of the Company but that it would be unfair to any class of

stakeholders to wind up the company and therefore, would justify only passing

of suitable direction, would not weigh at the stage of grant of interim relief

when only Interlocutory order may be required to be passed for regulating the

conduct of the Company's affairs. At this stage, interim relief can be granted on

the basis of legal considerations justifying such grant to prevent continuance of

or further prejudice to public interest in the affairs of the company. Having

regard to the nature of allegations and the proof sought to be adduced in

support of the same as coming to fore from the Inspection Reports, it can be

stated without any fear of contradiction that the Union of India has been able

to demonstrate that fair questions requiring probe have been raised in the 56

Company Petition which would entitle it to the final relief of replacement of

Directors of the Club with Government nominees to conduct the affairs of the

Club in accordance with the provisions of law and its charter.

45. Having regard to the issues raised in this appeal, the material on record

and the arguments advanced on behalf of the parties, we are of the considered

opinion that the impugned order, in so far as finding in regard to existence of a

prima facie case demonstrating that the affairs of the Club are being conducted

in a manner prejudicial to public interest, does not suffer from any legal

infirmity. We accordingly uphold the same. Consequently, Company Appeal

(AT) No.95 of 2020 is dismissed and Company Appeal (AT) No.94 of 2020 is

upheld to the extent of such finding.

46. Now coming to the last limb of the issue raised in Company Appeal (AT)

No.94 of 2020 in regard to the interim relief granted in terms of impugned

order being inadequate, be it seen that induction of two nominees by Central

Government as members in the GC to monitor the affairs of Club and give

suggestions to the GC is of no consequence as the voice of such nominees, on

account of their inferior numerical strength in GC is bound to be lost in the din

and the interim relief as granted would become meaningless. The interim relief,

to which the Union of India is found entitled to on the strength of a prima facie

case demonstrated by it, has to be effective and adequate enough to ensure

that the affairs of the Club are conducted in accordance with law and the

charter of the Club. The interim relief must prove to be result oriented. We 57

accordingly modify the interim relief by directing suspension of the GC and

appointment of an Administrator to be nominated by the Union of India to

manage the affairs of the Club and also direct that acceptance of new

membership or fee or any enhancement thereof till disposal of wait list

applications be kept on hold till disposal of the Company Petition. The interim

directions are accordingly modified and be carried into effect within two weeks.

The observations made hereinabove are limited to grant of interim relief.

The same shall not be construed as an expression of opinion on the merits of

the case.

We will be failing in our duty if we do not express our gratitude to Mr.

K.M. Natraja, learned ASG representing the Union of India and Mr. S.N.

Mookherjee, Senior Advocate representing the Respondents. But for their

valuable assistance, this judgment may not have seen the light of the day.

The appeals are accordingly disposed off. Judgment be communicated to

the Tribunal.

[Justice Bansi Lal Bhat] Acting Chairperson

[Justice Anant Bijay Singh] Member (Judicial)

[Dr. Ashok Kumar Mishra] Member (Technical) NEW DELHI 15th February, 2021 AR