397/398 - Forum Shopping - Company Law Board - Indian Company Law

Introduction:

It is a fact that it is very rare to see a petition by a group of minority or majority under section 397/398 of the Companies Act, 1956 in listed Public Companies. As everybody knows a Company needs to get qualified as per SEBI (DIP) regulations and should satisfy other requirements before getting its shares listed over a stock exchange. There can not be a listed public company where the entire shareholding is held by a single person or entity. The allotment shares are to be in accordance with the SEBI (DIP) regulations and there will be many stake holders holding shares in a Company. As such, normally it is very rare to see a petition by the minority or the majority in a listed public company under section 397/398 of the Companies Act, 1956.

Why many petitions are in respect of family companies?

Most of the petitions under section 397/398 of the Companies Act, 1956 come from family companies or closely held companies. Maintaining a petition by a minority or the majority under section 397/398 of the Companies Act, 1956 pertaining to a family company is very easy and it is logical. In spite of plethora of corporate regulations and encouragement to the companies to adhere to corporate governance, family companies are still run as proprietorship concerns. In some cases, we can not even find the books of account in family companies and all this issues will come to light when there comes serious dispute between or among the groups in the Company. Its true that a procedural irregularity will not give rise to filing a petition under section 397/398 of the Companies Act, 1956 and the section should never be misused. It is also true that a procedural irregularity may lead to a conclusion, at times, that it can be linked to oppression and mismanagement. There can not be a permanent rule as to whether a procedural irregularity can lead to a conclusion that there exist an oppression and mismanagement in the Company.

Point under discussion:

Thus, as many family companies do not maintain proper books of accounts and neglect filing the returns etc. with the authorities, it is so easy to allege oppression and mismanagement in respect of family companies and thus, most of the petitions under section 397/398 of the Companies Act, 1956 are maintained.

The point I want to discuss is about approaching various forums other than Company Law Board raising a Company Dispute. The jurisdiction of a civil court to entertain a company dispute is a complicated issue to dealwith and there is no express bar under the Companies Act, 1956 on Civil Court's jurisdiction. This issue is sought to be addressed in the new Companies Bill which contain a specific bar on the Civil Court's Jurisdiction.

Though, there is no bar in entertaining a Company Dispute unless an alternative and specific remedy is provided though Civil Courts do not encourage such litigation and advice the parties to approach the Company Law Board and its my personal opinion. The Civil Courts may lack the needed expertise in dealing with Company matters and it will lead the Civil Courts at times to hold that the proper forum is Company Law Board.

I have seen few cases where the minority shareholders or a director in a Family Company files a suit before a Civil Court alleging or challenging something in the Company. As the Civil Courts are bit cautious in granting an immediate relief and entertaining a Company Dispute even, a party who has approached the Civil Court may not get any relief and ultimately, after few years, he may be advised to approach the Company Law Board under section 397/398 of the Companies Act, 1956 and other provisions of law.

Complications:

When a party who has filed a Civil Suit alleging something and who has failed to get the intended relief by the Civil Court may be opposed very strongly when he files a petition under section 397/398 of the Companies Act, 1956 highlighting the same issue which he has raised in the suit. It is really a complicated issue to dealwith.

A shareholder might not have been advised well initially and will the same bar his corporal right to approach the Company Law Board under section 3976/398 of the Companies Act, 1956?

Whether a shareholder or a minority group is allowed to abuse the process of court by filing many petitions and approaching various forums causing vexation to the clear majority in the Company?

Whether the Company Law Board can look into the issue which is pending before the Civil Court?

Whether the Company Law Board can re-look into the issue upon which there was a finding by the Civil Court?

These are few questions and these are very complicated without having a straight answer as I feel. But, certainly, the rule is to be barring to do forum shopping causing a serious trouble to the majority as they should concentrate on their routine business without any hindrance. This is one type of issue pertaining to approaching different forums and finally approaching the Company Law Board under the provisions of Companies Act, 1956.

There are cases where in a petition under section 397/398 of the Companies Act, 1956, there will be a serious allegation and counter allegation on a particular thing and it will be the basis for filing and maintaining the petition under section 397/398 of the Companies Act, 1956. What happens is that a majority will initiate a counter proceeding against the petitioner/minority in the application under section 397/398 of the Companies Act, 1956, before some other forum and will stall the proceeding. The majority will contend that they have taken appropriate steps and other proceeding is initiated and pending and as such there is no need of keeping a petition under section 397/398 of the Companies Act, 1956 pending. This is another situation where normally a simultaneous proceeding is resorted to. There are many complicated issues and questions in the course and there can not be a straight jacket rule and it depends upon the facts and circumstances of each case.

Thus, the Company Law Board is burdened with discharging very complicated responsibilities under the Companies Act, 1956 and many will also criticize the Board for the delay and for not granting the relief immediately and for the delay caused due to the insistence on the procedural compliance.

Note: the views expressed are my personal.