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4/30/10

397/398 - Powers of CLB to set-aside agreements and charge etc. - Indian Company Law

I have been writing articles continuously on section 397/398 of the Companies Act, 1956 touching complicated and interesting areas as I feel. I am of the strong opinion that for good corporate growth, the law governing corporates or the companies should be clear and there should be an "effective redressel mechanism". A lot actually has been done to address the issue of "effective and speedy corporate dispute redressel" by constituting Company Law Board and now mooting to establish a National Company Law Tribunal and National Company Law Appellate Tribunal.

While I do completely agree with the reason behind constituting a special tribunal like Company Law Board and the National Company Law Appellate Tribunal, I am really worried at "effective and speedy redressel". Looking at the manner in which a winding-up petition is being adjudicated given the complications and limitations by the High Court or the Company Court, and looking at the manner in which the petitions under section 397/398 of the Companies Act, 1956, are being dealtwith by the Company Law Board now, I feel that the High Court or the Company Court provides effective and speedy reddressel. Liquidation is a complicated affair and we know the functioning of the office of Official Liquidator and the difficulties. Liquidation is a very complicated affair and it is not like exercising powers by the Company Law Board under section 397/398 of the Companies Act, 1956. There can be many reasons for this and many of the orders or the directions of the Company Court are being implemented without much difficulty. The High Court and the Supreme Court, being the constitutional courts, can interpret law and the interpretation becomes law binding on all the courts and tribunals in India and indirectly it binds all the citizens and entities.

Section 397/398 of the Companies Act, 1956 confers a very valuable right and redressel to the shareholders of the Company and especially for minority shareholders against oppression and mismanagement. The sections as referred to basically meant to provide preventive measures preventing the continuous acts of oppression and mismanagement. While preventing the majority in the company in committing the acts of oppression and mismanagement, the Company Law Board, under section 397/398, will certainly look into the validity of certain acts of the Company and will set-aside those. The Company Law Board can set-aside the illegal allotment of shares, declare the appointment of a director etc. as illegal and do all such acts as provided specifically under section 397/398 and also under section 402 of the Companies Act, 1956.

I do strongly feel that the Company Law Board should exercise all the powers needed while entertaining a petition under section 397/398 of the Companies Act, 1956 as otherwise, the Petitioners at times are confused as to the protection of their rights in the Company. The objective of the Company Law Board under section 397/398 is obviously to put an end to the matters complained of.

I have seen some adjudications where certain allegations in a Petition under section 397/398 of the Companies Act, 1956 are not looked-into on the ground that the disputed facts can not be decided by the Company Law Board which follows a summary procedure. With great respect, I believe that the proposition may not be right as the Debt Recovery Tribunal decides all disputed facts through a well laid summary procedure and the discretion is exercised by the Debt Recovery Tribunal to have a trial on a particular issue if required.

The specific issue I want to deal with is about the exercise of powers by the Company Law Board to set-aside agreements, contracts and charges etc. which gives rise to the Petitioners to allege mismanagement. This is very interesting and complicated issue too.

There can be an agreement, contract or a transaction between the Company and a third party. Its true that an agreement, contract or a transaction can give rise to a shareholder to allege mismanagement of funds and he can seek for the prevention of future mismanagement. But, how to get those illegal agreements, contracts or charges etc. to be set-aside.? If Company Law Board has no power to set-aside illegal agreements, contracts or the charges, then, obviously one has to go to Civil Court challenging those transactions. But, what happens if the Company Law Board entertains the prayer initially and disposes of the matter after few years stating that the Company Law Board has no power to deal with a particular transaction entered into between the Company and a third party. There will be issues of law of limitation and also equity will come and the disposal of a Civil dispute will take few years as everybody knows. These issues have troubled many companies and many companies and the shareholders are still being troubled with the ambiguous situation the powers of Company Law Board to deal with transactions, contracts and the agreements etc.

I do agree that there is a specific reference on the powers of Company Law Board to set-aside agreements etc. under section 402 of the Act. Even if we keep the required reforms and clarifications on the powers of Company Law Board apart, what about the related party transactions and its validity. I do strongly feel that the Company Law Board can straight away deal with related party transactions and there is no impediment under section 402 of the Act. In my opinion, a related party transaction can not be seen at par with a transaction entered into between the Company and a third party.

I am of the opinion that we need a clarification in law and Company Law Board and the National Company Law Tribunal should exercise even remedial measures if required and there should not be any impediment on the powers of CLB.

Even in the proposed companies bill, there is no reference on the issue under discussion though there is a specific reference to the jurisdiction of Civil Court and there is a specific bar.

It is also true that many facts are to be taken into consideration while the Company Law Board exercises its power under section 397/398 of the Companies Act, 1956.

I believe that we need a law or the regulation in the proposed companies bill that the Company Law Board can take-up the reliefs suo motu upon which the Board feels that it has no jurisdiction initially and so that the parties are at liberty to approach other forums or to get an order in Appeal on the jurisdiction of the Company Law Board.

Section 397/398 of the Companies Act, 1956 deals with the issues which are of serious in nature and as such, there should be clarity on the law and the powers of Company Law Board.

The issue can still be elaborated and made clear and I will do it in the course.

Note: the views expressed are my personal.

1 comment:

  1. Hi,The company shall be managed by the holder of its share capital, who may appoint with Registered Agents in Qatar as one or more managers to represent the company in its transactions. Thanks....

    ReplyDelete