397/398 - scope of section 403 - Indian Company Law

I have seen an interesting case in the recent past and that led me to look at the scope of section 403 of the Companies Act, 1956. I did not find so much case law on section 403 of the Companies Act, 1956 as section 403 is viewed at par with section 402 and as the precedents laid-down by the Constitutional Courts confers elaborate powers on the Company Law Board under section 397/398 of the Companies Act, 1956. It is settled that the Company Law Board can pass any order in the interest of the Company and in order to put an end to the matters complained of. It is also settled that sect6ion 402 of the Companies Act, 1956, though enumerates certain powers of the Company Law Board, the same will not restrain the general powers of the Company Law Board under section 397/398 of the Companies Act, 1956. In light of the settled legal position about the powers of the Company Law Board and if technicalities are ignored, section 403 of the Companies Act, 1956 was not discussed much.

What happens normally is that the Company Law Board can pass interim orders in favour of the Petitioners in a proceeding under section 397/398 of the Companies Act, 1956 pending the main Petition. When an interim order or the direction is given by the Company Law Board infavour of the Petitioners under section 397/398 of the Companies Act, 1956, the same can be modified and also can be vacated. Normally, in reply to the allegations in the petition and the interim applications, the respondents in a proceeding under section 397/398 of the Companies Act, 1956, will file their counter statement or the reply. Based on the pleadings, the Company Law Board passes such orders as it thinks fit and in order to fulfill the object of section 397/398 of the Companies Act, 1956. The interim orders or the directions in a proceeding under section 397/398 of the Companies Act, 1956 are basically to be viewed from the angle of the Petitioners or the Complainants. Ultimately, the Petitioners under section 397/398 of the Companies Act, 1956 may not succeed and the observations in the order may go in favour of the Respondents too. But, what happens if the Company Law Board passes various orders in favour of the Respondents effectively in the Petition filed under section 397/398 of the Companies Act, 1956? This is an interesting issue to deal with. From the stage where the courts have laid-down the basic requirements to maintain a petition under section 397/398 of the Companies Act, 1956 by defining the acts of ‘oppression’ and ‘mismanagement’, we have now reached a stage where the Company Law Board can pass orders in a proceeding under section 397/398 of the Companies Act, 1956 even if the ‘oppression’ and ‘mismanagement’ is not established. The interpretation now sought to be made is that the Company Law Board can pass various orders even when there is no ‘oppression’ and ‘mismanagement’ and it is now sought to be justified that it is the responsibility of the Company Law Board to correct the deadlock in the Company though there is no oppression or mismanagement. While I am not referring the authoritative precedent on the change of legal position or the practice, I am sure that the view is being changed on section 397/398 of the Companies Act, 1956 and it appears to be on a strong footing and may be maintained by the highest Constitutional Court in this country.

Coming back to the issue of scope of section 403 of the Companies Act, 1956, there is a reference like ‘upon the application of any party to the proceeding’. Construing the said wording will be very important as a proceeding under section 397/398 of the Companies Act, 1956 is basically seen as proceeding between the minority and majority shareholders. There can be transactions between the Company and a third party and the said transaction may be questioned by the minority in a proceeding under section 397/398 of the Companies Act, 1956. Under such circumstances, based on the principles of natural justice, the third party should be made as a party to the proceeding for effective adjudication of the dispute under section 397/398 of the Companies Act, 1956. Again, a person can be impleaded as a party to a proceeding under section 397/398 of the Companies Act, 1956 if required and felt necessary by the Company Law Board. In the case I have seen, a person who is not a shareholder in the Company and been made as party under section 397/398 of the Companies Act, 1956, had filed an application under section 403 and got an effective direction or a declaration in his favour. This is a strange situation that led me to focus on the scope of section 403 and on the wording ‘upon the application of any party to the proceeding’. I could find only a small reference in a precedent during 1960’s where the Court has implied that though there are many petitioners under section 397/398 of the Companies Act, 1956, one petitioner can file an application under section 403 of the Companies Act, 1956 and that is how the wording ‘upon the application of any party to the proceeding’ has been interpreted or understood in my opinion.

While there can be complications in giving a restrictive meaning to section 403, there can also be complications if wide scope is conferred on section 403. What can not be done under section 397/398 and 402, can be done using section 403 if the wide scope is conferred on section 403 of the Companies Act, 1956.

Though, only four sections of Companies Act, 1956 viz., 397, 398. 402 and 403, deal with the issue of providing a relief to the minority shareholders against the acts of oppression and mismanagement in the Company by the majority, the subject has drawn so much attention and interpretation of the provisions is being differed from one case to another based on variety of situations.

Note: the views expressed are my personal, does not represent any case and the brief is given only with academic interest and for sharing the knowledge in the course, and also I am aware of various complications in dealing with the subject.