Is it possible to lay a hard and fast rule on the Powers of Company Law Board under section 397/398 of Companies Act, 1956?

It is known to the corporate professionals that there are so many complications in getting the disputes resolved among shareholders in the Company. The disputes among the shareholders or the groups tend to come in closely held companies as the largely held Public Limited Companies should follow SEBI (DIP) regulations while allotting shares and as SEBI and the Stock Exchange monitors various issues in respect of Listed Public Companies. When the trust is lost between or among the groups in a Company, then, each group tries to take control over the Company or the affairs of the Company by resorting to certain acts. The law governing the protection of the rights of the shareholders is very complicated despite the protection given to the shareholders against oppression and mismanagement under section 397/398 of Companies Act, 1956. When there is oppression or mismanagement in a Company, the aggrieved group can approach the Civil Court at times, Company Law Board in most of the cases and can even approach the High Court seeking winding-up of the Company. There are complications in getting the corporate disputes resolved through Civil Court and as such there is a specific bar on Civil Courts’ Jurisdiction in respect of Company cases under the proposed Companies Bill. Again, when the Company is a going concern, the High Court may not favour winding-up a Company and as such the remedy provided under section 397/398 of the Companies Act, 1956 is important for the aggrieved shareholders or the aggrieved group against oppression and mismanagement. There are concerns that the remedy provided by the Company Law Board is not effective and there are also concerns that the remedy before the Board under section 397/398 of the Companies Act, 1956 is getting misused.

If we keep the other broader issues apart, the powers of the Company Law Board under section 397/398 of the Companies Act, 1956 were the subject matter of discussion among the corporate and the corporate professionals dealing with issue very frequently. There are so many precedents on section 397/398 of the Act and also on the powers of the Company Law Board. If we keep the express limitation on the powers of the Company Law Board under section 402 apart, even otherwise, the powers of the Company Law Board were the subject matter of discussion in many appeals and even before the Hon’ble Supreme Court of India. It is true that the precedents laid-down by the Constitutional Courts to be interpreted in right spirit and the settled practice are to be adhered to. Despite so many guidelines from the Constitutional Courts on the proceedings before the Company Law Board under section 397/398 of the Companies Act, 1956, there exist complications and the Board may have to deal with variety of situations in each case before it. Many are in dilemma as to the scope of section 397/398 of the Companies Act, 1956 and also the powers of the Company Law Board. There are judgments where the Courts held that the Company Law Board can not exercise the powers which are not expressly conferred on it and there are judgments supporting the argument of elaborate powers of the Company Law Board under section 397/398 of the Companies Act, 1956.

In my personal opinion, the observation of Hon’ble Supreme Court of India in M.S.D.C. Radharamanan Vs. M.S.D. Chandrasekara Raja & Another reported in 2008 (6) SCC 750: 2008 AIR (SC) 1738: 2008 (5) SCR 182: 2008 (3) SCALE 650: 2008 (4) KCCR 299 (SN), is the correct legal position and the approach on the issue of the powers of the Company Law Board under section 397/398 of the Companies Act, 1956 and the reference in the judgment referred above is extracted hereunder:

“19. The provisions of the Act vis-a-vis the jurisdiction of the Company Law Board must be considered having regard to the complex situation(s) which may arise in the cases before it. No hard and fast rule can be laid down. There cannot be any doubt whatsoever that the acts of omission and commission on the part of a member of a company should be qua the management of the company, but it is difficult to accept the proposition that the just and equitable test, which should be held to be applicable in a case for winding up of a company, is totally outside the purview of SECTION 397 of the Act. The function of a Company Law Board in such matters is first to see as to how the interest of the company vis-a-vis its shareholders can be safeguarded. The Company Law Board must also make an endeavour to find out as to whether an order of winding up will serve the interest of the company or subvert the same. Further, if an application is filed under Section 433 of the Act or SECTION 397 and/or 398 thereof, an order of winding up may be passed, but as noticed hereinbefore, the Company Law Board in a winding up application may refuse to do so, if any other remedy is available. The Company Law Board may not shut its doors only on sheer technicality even if it is found as of fact that unless the jurisdiction under Section 402 of the Act is exercised, there will be a complete mismanagement in regard to the affairs of the company.

20. Sections 397 and 398 of the Act empower the Company Law Board to remove oppression and mismanagement. If the consequences of refusal to exercise jurisdiction would lead to a total chaos or mismanagement of the company, would still the Company Law Board be powerless to pass appropriate orders is the question. If a literal interpretation to the provisions of SECTION 397 or 398 is taken recourse to, may be that would be the consequence. But jurisdiction of the Company Law Board having been couched in wide terms and as diverse reliefs can be granted by it to keep the company functioning; is it not desirable to pass an order which for all intent and purport would be beneficial to the company itself and the majority of the members? A court of law can hardly satisfy all the litigants before it. This, however, by itself would not mean that the Company Law Board would refuse to exercise its jurisdiction, although the statute confers such a power on it.”

As such, there can not be any hard and fast rule on the powers of Company Law Board under section 397/398 and section 402 of the Companies Act, 1956 while certain limitations and settled principles are necessary to be followed.

Note: the views expressed are my personal.