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4/22/10

Petition under section 397/398 - Maintainability - a Case Study - Indian Company Law?

I have been writing articles on various issues touching the corporate world and especially the issues under Companies Act, 1956. I was concentrating more on the law pertaining to Oppression and Mismanagement as dealt with under section 397/398 of the Companies Act, 1956. Law governing the rights of the minority, the propriety of the majority and the protection given to the shareholders under section 397/398 of the Act, is always very interesting and also complicated. There are many interesting and complicated issues under section 397/398 of the Companies Act, 1956. We normally see the allegations of Oppression and Mismanagement in private companies and closely held public companies and it is really rare to see the allegations of Oppression and Mismanagement in respect of listed Public Companies and it can attributed to the plethora of regulations prescribed by SEBI, the shareholding patterns and the mandate of Corporate Governance.


A petition under section 397/398 of the Companies Act, 1956 is to be carefully handled by the Petitioner who approaches the Company Law Board, the majority in the Company against whom an allegation of Oppression and Mismanagement is made and also by the adjudicatory forum or the Company Law Board. It is very complicated litigation as I feel and as I have seen the litigation practically. The presentation of case is difficult and also deciding the case will also be difficult at times.

There are minority shareholders who say that their rights and interests are not being protected properly despite the guarantee of their rights on paper under the provisions of the Companies Act, 1956. On the same footing, there are majority who feels that section 397/398 of the Companies Act, 1956 is being misused and the majority in the Company is being troubled unnecessary abusing the process and they are not able to concentrate on their regular affairs.


I want to deal with the issue of maintainability of the Company Petition on the ground that the essentials for maintaining the petition under section 397/398 of the Companies Act, 1956 are prima facie absent. It is really an interesting issue and a case I have been asked to handle which prompted me to deal with the issue and write something.


We do see filing interim applications in the main Company Petition under section 397/398 of the Companies Act, 1956 requesting the Company Law Board to take-up the issue of maintainability as preliminary issue and consequently asking for dismissal of the Company Petition. I do believe that the application seeking maintainability of Company Petition are rarely entertained or allowed practically by the Board and there can be good justification for that also. Instead of taking up the issue of maintainability, the Company Law Board may ask the parties to file their papers like reply with documentary proof and the Company Petition can be decided finally and after final hearing as per the regular procedure.


The issue of maintainability of a Company Petition under section 397/398 of the Companies Act, 1956 is normally raised on the ground that the petitioners do not qualify to present the Petition under section 399 and at times, procedural irregularities can also be pointed-out while asking for dismissal of the Company Petition prima facie. I personally feel that the applications seeing maintainability are not entertained without looking into the entire issue after asking the opposite party to file their detailed reply to the main Company Petition. Its my opinion. Again, it is an issue as to whether an application under section 397/398 of the Companies Act, 1956 is to be dismissed on procedural irregularities and on the disputes pertaining to share holding and consequent qualification under section 399. Because, the object of section 397/398 has been referred to extensively by the Company Law Board, High Court and also Apex Court in many cases.


While I have exposed the practical things when it comes to filing applications questioning the maintainability of a Company Petition under section 397/398, I want to deal with the issue of maintainability on the ground that the essentials to maintain a petition under section 397/398 of the Companies Act, 1956 are absent prima facie and in those cases, an application questioning the maintainability of the petition under section 397/398 is maintainable.


First I want to present the facts of a case with which I am connected to and then there is a discussion on the issue of maintainability of the Company petition at the end hereunder.


Facts of the Case:


1. A closely held Private Company is incorporated in the year 1992 having family members as the shareholders. The head of the family and his two sons are shown as Managing Director and Joint Managing Directors respectively in the Articles of Association.


2. The Company was making profits continuously. The head of the family and the Managing Director held substantial number of shares in his name.


3. The properties belonging to the family were partitioned duly during the life time of the Managing Director itself and it is in the year 2002.

4. The Managing Director and head of the family has held substantial number of shares in his name even after the Partition and he is at liberty to dispose the shares as per his wish and will.


5. The head of the family and the Managing Director has executed a will bequeathing his shareholding to one of his son initially during the year 2005 and the reference for him is "A" while the other son is referred to herein as "B".


6. The head of the family has revoked his ‘will’ executed during the year 2005 infavour of "A" and executes another will in the year 2006 and it is duly probated. In the second ‘will’ executed in the year 2006, the head of the family bequeaths his shareholding in favour of "B".


7. "A" has the knowledge of the ‘will’ executed by his father in favour of "B" and he remains silent and “B” was not questioned.


8. The head of the family and the managing director has expired in the year 2008 and after the expiry; "B" has called for a Board meeting for transmission of shares in his favour pursuant to the “will” executed in his favour during the year 2006.


9. "A" files a Civil Suit in the year 2008 itself seeking for a declaration that the Will executed by his father in the year 2006 in favour of "B" is null and void. No orders were obtained from the Civil Court and the case is simply pending and even "A" is not attending the court regularly.

10. Now, "B" becomes majority in the Company having 89% shareholding and "A" is having only 11% shareholding.


11. The Company is being effectively maintained by "B" as he is the majority and the Company maintains documents and also accounts without any concealment of facts whatsoever. The Company sends the notice of Board to the "A" as he is also a director.


12. "A" never attends the Board meetings; however, he is jealous of "B" as he is holding majority shareholding in the Company and wanted to trouble him.


13. Now, "B" files a petition before the Company Law Board leveling vague allegations and alleging oppression and mismanagement. No specifics have been given by "A" in his Petition and it is prima facie is clear that there is no substantial allegation of Oppression and Mismanagement and that to having continuing nature.


Discussion:

The facts of the case are very clear that the majority is being troubled by minority by leveling some baseless allegations and files a Petition under section 397/398 of the Act. Now, "B" is scared of the proceedings as he has not done anything illegal and he wants the dismissal of the Petition prima facie. It is an interesting issue. There can be two arguments on the issue. One is that the "B" should not suffer a proceeding under section 397/398 of the Act where there is no case prima facie. The second argument is that the issue as to whether there is prima facie case exists or not, is to be decided after the full proceeding and can be decided only during the final hearing and it may take few years practically as we see.


Conclusion:

It is really very difficult to conclude the issue as to whether an application seeking dismissal of the main Company Petition under section 397/398 be entertained on the ground that the essentials under the section are not made-out prima facie. In my personal opinion, such an application can be entertained, but, it will really be seen as the Company Law Board normally favours settlement of the case where the Company is a family company or closely held Company, and it is only when there is no likelihood of settlement, the Company Petition is decided in accordance with law.


Note: The views expressed are my personal and the write-up is academic.



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