397/398 - CLB/NCLT - concerns of various shareholders?

The Companies Act, 1956, though it requires some reforms as mooted through Companies Bill, 2009, is one of the finest legislations. Each provision or the section under the Companies Act, 1956 has a sound logic though there exist very few sections which are to be deleted or modified suitably. The shareholders may not participate in day-to-day affairs of the Company, but, still, their rights are protected as every Company is supposed to maintain books of accounts, conduct the required Board meetings, file the statutory returns and inform the shareholders of the Company about its functioning and the development in a particular year through annual returns and annual accounts which are also accompanied by the Director's report and the Auditor's report. When we think as to how a concern, as an incorporated company functions, the entire legal frame-work is interesting and appears to be logically sound. It is also true that many listed public companies follow the regulatory framework of Company Law in India scrupulously. Many shareholders of a listed company may not even look at the affairs of the Company in detail though they receive documents and communications from the Company very often. Listed public Companies are well regulated in view of SEBI regulations, listing agreement with Stock Exchanges and the continuous supervision of SEBI and the Stock Exchanges.

Contrary to the functioning of listed public companies, private companies or the closely held companies ignore the regulatory framework of Company Law and they think that they are the proprietors of the Company. Though, we very frequently use the word "family company", there is no such description of a Company under the provisions of Companies Act, 1956. It is also true that the private companies are given liberty to have their own internal regulations through Articles of Association and Share Transfers are regulated. While there is no problem with a private company where the entire shareholding is held by a family or a group of persons without any difference of opinion, practically, every company tends to think about expansion of the Company and attraction of more investment into the Company which results in the change in the shareholding pattern of a private company very frequently. In many cases, the change in the shareholding pattern of a company is preceded by an agreement between the Company and the investors. As everybody is a human being with natural emotions and greed, there tend to be some difference of opinion among the members which will end up with drastic consequences. When the trust is lost among the shareholders or between two groups in the Company, then, the consequences of breach of trust would be disastrous. With the disbelief, one group tries to dominate the affairs in the Company and serious differences thus erupt. It is a reality in corporate sector that there tend to be some business secrets, and concealment etc.

Though there is no oppression or mismanagement in the Company, taking advantage of the knowledge of business secrets and concealment, a group of shareholders who qualify under section 399 of the Companies Act, 1956 approach the Company Law Board under section 397/398 of the Companies Act, 1956. As everybody knows, section 397/398 of the Companies Act, 1956 meant to provide a preventive measure for the protection of the rights of the minority shareholders. Company Law Board has been conferred with elaborate powers under section 397/398 of the Companies Act, 1956 in order to put an end to the matters complained of while it is also true that there are express limitations on the powers of Company Law Board under section 397/398 of the Act. There are so many lengthy judgments on section 397/398 of the Companies Act, 1956 in view of complications and the stakes involved. It will never be an easy task to understand a company dispute and pass orders and naturally there will be delay in getting the required orders under section 397/398 of the Companies Act, 1956. The general opinion of shareholders in a private company when they approach the Company Law Board under section 397/398 of the Companies Act, 1956 is that the protection to their rights as envisaged under section 397/398 is not effective.

Few concerns of various shareholders who approach the Company Law Board and who require a remedial measure, as I perceive, are as follows.

Concerns or the feelings of Majority Shareholders or group:

1. Majority tends to rely on majority rule and they will never be happy when a minority tries to trouble the majority by leveling allegations.

2. Majority feels that though they have not committed any act of oppression and mismanagement, the minority shareholders who were privy to business secrets take advantage of those things and tries to trouble the majority.

3. Majority feels that they never want a minority group who intends to trouble the Company; however, acquiring the shares of the minority will be a difficult exercise as there will be unreasonable bargaining and financial difficulties.

4. Majority feels that it has become so easy for a group of shareholders or a minority group in the Company to trouble the majority as a mere allegation can do all the damage.

5. Majority truly feels that they are not provided with any remedy under the provisions of the Companies Act, 1956 thinking that majority rule prevails in the Company and the majority can take any decision in the AGM.

6. Majority never wants to expose themselves as powerless and a group which is not able to deal with the minority and as such they may have to face the obstructions by the minority continually.

7. Though the majority in a Company too can approach the Company Law Board under section 397/398 of the Companies Act, 1956, they may not be able to do so when already a minority group has approached the Board seeking some measures under section 397/398 of the Act. When both the majority and the minority allege something, naturally, the conclusion will be that there exist a deadlock in the Company and consequences will follow. Majority never wants such a situation.

8. Majority group always gets troubled with the filing of fictitious forms with the Registrar of Companies (ROC) and they are still not aware of the remedies to get the fictitious forms removed from the MCA portal. This has become a serious issue in most of the Companies and the issue requires a careful consideration for suitable reforms in law and the practice.

9. Majority feels that the applications under section 397/398 of the Act are loosely entertained and pendency of a petition under section 397/398 of the Act has its own consequences on the functioning of the Company.

Concerns or the feelings of minority:

1. Minority shareholders too have many grievances at the preventive and remedial measures available to them when they are oppressed and the company is mismanaged.

2. Minority shareholders were of the opinion that the remedial and preventive measures provided under section 397/398 of the Companies Act, 1956 are not effective.

3. Minority shareholders feel that there is so much delay in getting the required orders from the Board under section 397/398 of the Act.

4. Minority shareholders feel that the orders of the Company Law Board are read between lines by the majority and getting the orders implemented has become a bigger issue.

5. Minority shareholders feel that there are express limitations on the powers of the Company Law Board under section 397/398 and as such they have to approach many forums on the same issue simultaneously.

6. Minority shareholders are scared to approach the Civil Court as they feel that the procedure before civil court is hectic and prolonged.

7. Minority shareholders feel that though they were willing to disassociate from the Company, the exist option is not reasonable with all undervaluation in most of the cases.

Reforms required:

Than ever before, the issue of filing fictitious forms or uploading fictitious forms with MCA portal has become a very serious issue now. The ROC is advising the Company to approach the Company Law Board or the Court and get an order even when an apparent illegality with regard to filing is pointed-out. The majority is hesitant to say that they are being oppressed by the minority though it can happen practically. With the existing legal position, in many cases, the shareholders are forced to approach simultaneous forums and the issue needs to be effectively addressed. The issue of simultaneous proceedings is sought to be addressed in the proposed Companies Bill which contain a specific bar on the Civil Courts to entertain company disputes or matters. There are complications in course even with the specific bar on the jurisdiction of Civil Courts. Such a bar under other special legislations like SARFAECI Act, 2002 can be effective, but, I don’t think that the bar on Civil Courts can be effective under the proposed Companies Bill. The issue of removing fictitious forms is to be addressed on urgent basis. The proceedings of the Company Law Board now and the National Company Law Tribunal in future should be really effective. With many directives of the Supreme Court now on the constitution of National Company Law Tribunal, we hope that the situation will change. We need to have active and knowledgeable presiding officers who are independent in discharge of their functions. A difference between the proceedings of the Company Law Board and the High Court is apparent now and we can see shouting in Company Law Board and it is very rare to see shouting before the High Court. All these issues appear to be very small, but, a lot to convey. The proposed National Company Law Tribunal can never be a High Court, but, in reality, the National Company Law Tribunal discharges the functions of High Court as most of the powers now exercised by the High Court under the Companies Act, 1956 are sought to be transferred to the proposed National Company Law Tribunal.

Note: the views expressed are my personal and I have no intention to insult any institution.