397/398 - COMPANY LAW BOARD - INTERPRETATION - INDIAN COMPANY LAW

Many books were written on the subject of legal interpretation by the Courts and we have so many precedents on the same. In my opinion, the subject of interpretation is driven by the principle that the courts concerned will ascertain the legislative intention of a particular legislation or a provision and only in exceptional cases, the clear legislative intention is not considered when the same is opposed to public policy/constitutional provisions or the fundamental rights as enshrined in Part-III of Constitution of India. Because, the concerned legislature is the law-making body though we say that the judgment of a Constitutional Court becomes law unless overruled. The legislative intention of a particular legislation is gathered from the wording used, the objects, the title, the explanation clause etc. In my opinion, the subject of interpretation is based on the simple logic and we have so many judgments on the issue. Even today, when a case is represented before a Constitutional Court, it is seen that the judgments on the issue of interpretation are submitted though the subject is settled.

A proceeding under section 397/398 of the Companies Act, 1956 is complicated in my opinion, but, the stakes in many petitions under section 397/398 of the Act is more. A minority shareholder in the Company may trouble the clear majority in the Company though there is no illegality on the part of the Company or the majority by abusing section 397/398 of the Companies Act, 1956. On the same lines, a majority may deny the legitimate corporate rights of the minority shareholders and may rely on technicalities when the minority shareholders approach the Board seeking relief under section 397/398 of the Companies Act, 1956. Barring very few principles, the Courts have given very good judgments on section 397/398 of the Companies Act, 1956 and many principles are now settled. Despite the guidance from the Constitutional Courts through precedents, many feel that the Company Law Board often relies on technicalities while exercising powers under section 397/398 of the Companies Act, 1956. There can be an agreement between the Company and an outsider which is illegal, but, still, when the same illegal agreement is questioned by the minority before the Board, then, the majority may show the restrictions under section 402 of the Act and may rely on the principle that “disputed facts can not be decided by the Company as it follows summary procedure”. The correct interpretation of provisions dealing with oppression and mismanagement with the ultimate object of protecting the rights of the minority or providing a relief is so important in my opinion. I do personally feel that we need much more clarity in the provisions dealing with oppression and mismanagement, but, I don’t know as to how the proposed Company Bill addresses this. In my opinion, it is unlikely to see the clarity on the provisions dealing with oppression and mismanagement in the Companies Act, 1956 in the near future though we may be able to have “National Company Law Tribunal” and “National Company Law Appellate Tribunal”. When it is observed practically as to how minority shareholders and even the majority are struggling for getting their disputes resolved and also proceedings before the Company Law Board at times, then, it is clear that the directions of the Hon’ble Supreme Court on the issue of challenge to Companies (Amendment) Act, 2002 are to be implemented in letter and spirit and finding loopholes and any dilution can not be tolerated.

I have recently read a judgment rendered by Hon’ble Dr.Justice D.Y.Chandrachud of Bombay High Court in Company Appeal No.51 of 2009 and I think that the manner in which the issue in the Appeal was dealt with and the observations can be of guidance on the issue as to how the provisions dealing with the oppression and mismanagement are to be interpreted. I have just extracted the important discussion/reference of the Hon’ble Bombay High Court hereunder. The judgment rendered below is basically on section 405 and 402 of the Companies Act, 1956, however, the analysis and the finding is laudable in my opinion.

High Court of Judicature at Bombay – Dr.Justice D.Y.Chandrachud – Company Appeal No.51 of 2009 – between Ravi Kiran Agarwal & Others Vs. Moolchand Shah S/o Mr. (Late) Sampat Raj & Others:

“13. Section 405 of the Act, deals with the power of the Company Law Board to implead additional Respondents to an application under Sections 397 or 398. Under section 405, if the Managing Director or any Director or a Manager of a company or any other person, has not been impleaded and such person applies to be added as a Respondent, the Company Law Board is empowered to pass an order added him as Respondent, if sufficient cause for doing so is established to the satisfaction of the Board. The Company Law Board in the present case inferred that the power to add or implead a party as a Respondent to an Application under Sections 397 or 398 is to add only those parties who are referred to in clause (d) and (e) of section 402. The Board applied the interpretative tool of ejusdem generis. The principle of ejusdem generis would have no application, where the Court is required to construe, two separate statutory provisions which operate in different fields. Section 402 illustrates the powers which can be exercised by the Company Law Board on an Application under Sections 397 and 398. Section 402 is not an exhaustive catalogue of the powers of the Board. Section 405 deals with the addition of parties. There is no reason on justification for confining the words “any other person” under Section 405 to those categories of persons who are elucidated in clause (e) of the Section 402. As a matter of first principle, it would be impermissible to do so. On an Application under Sections 397 and 398 the Board has, as already noted earlier, wide powers to pass orders as it thinks fit to bring to an end the matters of complained of and, under section 398(2), to even prevent the matters complained of or apprehended. The exercise of those wide powers, may in a given situation affect the interest of third parties. To hold that a third party liable to be affected by an order under SECTION 397 and 398, would not be entitled to be heard on the ground that, it does not fall within the description of ‘a person’ in clause (e) of section 402 who has an agreement with the company would be fundamentally violative of the basic postulate of natural justice. Nothing, except a clear statutory provision to that effect should lead the court to adopt such a construction. If Parliament intended to contemplate the addition of only those persons who had Agreements with the Company, there was nothing to prevent the addition of those words. The words “any other person” in Section 405 are not restricted by a stipulation that such person must have an Agreement with the Company. Hence, the words “any other person” must be given their plain and natural meaning so as to include any person whose interest would be affected by an order that is sought in the application under SECTION 397 and 398. The Board misapplied the principle of ejusdem generis. The principle of ejusdem generis is that when particular words pertaining to a class category or genus are followed by general words, the general words are construed as limited to things of the same kind as those specified. The rule applies when i) The Statute contends an enumeration of specific words; ii) The subject of enumeration constitutes a class or category; iii) The class or category is not exhausted by the enumeration; iv) General terms follow upon the enumeration; and v) there is no indication of a different legislative intent. [G.P.Singh on the Principles of Statue Interpretation, 9th Edition page 420.] This principle can have no application in construing word “any other person” in section 405 which operates in a field untrammeled by section 402.

14. The Company Law Board has in the present case diluted its finding that the expression “any other person” under section 405 must be construed with reference to section 402(e) by holding that occasions may arise to implead other persons on the facts of each case. The Board noted that shareholders who are not parties may apply on the apprehension that, any relief granted would affect their interest or employees or creditors may also apply on the same ground. The Board held that notwithstanding the ‘strict’ provisions of section 405, it may have to use it discretion in deciding on the basis of the facts of each case, where the application for impleadment has shown sufficient cause to be impleaded as a Respondent. The residual discretion which the Board assumes to it, would itself indicate that the provisions of Section 405 cannot be construed in the manner in which they were construed in the earlier part of the judgment. The interpretation that has been placed by the Board on the provisions of section 405 is erroneous and has to be disapproved. The power of the Board under section 405 to implead any other person, is a wide power which is conditioned, only by the satisfaction of the Board, that there is sufficient cause for doing so. Where the relief that is sought in the application under Sections 397 or 398 is liable to affect the interest of a third party, an order of impleadment would be warranted. The impleadment of the party may be considered necessary, or in the facts of a case, proper in order to enable the Board to render a full, final and complete adjudication of the dispute. By its very nature, the power cannot be restricted to predefined categories and must be exercised in order to advance the underlying purpose and object of the provisions of Sections 397 and 398.”

“18. The Appeal before this Court arises under section 10F of the COMPANIES ACT 1956 and is confined to a question of law. For the reasons already indicated, this court has come to the conclusion that the interpretation that has been by the Board on the provisions of section 405 is erroneous. Having decided the question of law relating to the interpretation of the section 405, it would be, but appropriate for this Court to remit the proceedings back to the Company Law Board for a decision afresh, on the application for impleadment. The Board is a primary fact finding authority and should be left to determine the question of impleadment in the light of the interpretation that has been placed by this Court on the provisions of section 405. Before concluding, it would be necessary to observe that in adverting to the rival submissions, which have been urged on behalf of the parties in regard to the effect of the MOU, this Court has had no occasion to render any finding of fact on the effect of the MOU or on the entitlement of the Appellants thereunder. In order to facilitate a fresh determination, the impugned order of the Company Law Board dated 13th April 2009 is set aside.”

Note: I views expressed are my personal and based on my own understanding of the issue and I have no intention whatsoever to make an unwarranted comment on any institution.