Civil Procedure Code and a proceeding under section 397/398 of Companies Act, 1956?

I have read few judgments on a proceeding under section 397/398 of Companies Act, 1956 placing reliance on Company Law Board regulations and based on the procedural technicality. With great respect to the courts, I do strongly feel that the Company Law Board should not go technically in a proceeding under section 397/398 of the Companies Act, 1956. If there is a regulation or a provision with sound logic clearly suggesting at the strict application of the Company Law Board regulations, then, the legislative intention could be given effect to. In my opinion, the Company Law Board regulations with regard to a proceeding under section 397/398 of the Companies Act, 1956 only provides the settled procedure applicable for adjudication and it is not detailed. The Code of Civil Procedure is criticized most on the ground that it causes delay in a proceeding. But, one should remember that each and every provision in the Code of Civil Procedure has sound logic. However, when a special tribunal like Company Law Board is constituted, it is ensured that the Tribunal need not follow the Code of Civil Procedure.

A proceeding under section 397/398 of the Companies Act, 1956 is very complicated and if technicalities are looked into or insisted, then, the Company Law Board may not be able to fulfill the object of regulating the affairs of the company and especially “putting an end to the matters complained of”. There is a clear difference between an ordinary civil proceeding and a proceeding under section 397/398 of the Companies Act, 1956. In a civil proceeding, the subject pertains to a past act or omission on the part of any party normally and the pendency of a civil suit may not affect the parties as such. That is not the case with a proceeding under section 397/398 of the Companies Act, 1956. In a proceeding under section 397/398 of the Companies Act, 1956, the company can be a going concern, there can be many interested parties in the company, the company has to comply with the provisions of the companies act continually, the company should maintain accounts, the company should file requisite forms and accounts, the company should borrow funds, the company should concentrate on expansion activities, there can be continuous oppression by the majority, there can be torture by the minority and the acts of oppression and mismanagement may continue irrespective of pendency of a case before the Company Law Board under section 397/398 of the Companies Act, 1956. Thus, a proceeding under section 397/398 of the Companies Act, 1956 stands on a different footing and complicated too.

We can look at a simple example. The minority qualifying under section 399 of the Companies Act, 1956 can file a petition before CLB alleging continuous acts of oppression and mismanagement. Even after the filing of the petition, the Company may tend to do certain acts amounting to further oppression and mismanagement. Technically, the Company Law Board may not consider the further oppressive acts of the majority in the proceeding and may ask the minority to challenge the further oppressive act by amending the main Company Petition. To me, it is a mere technicality denying justice to the minority and defeating the object of the Act. Again, the majority can have a grievance against the minority and can allege something against the minority in their counter to the petition filed by the Minority before the CLB under section 397/398 of the Companies Act, 1956. Under such circumstances, technically, the Board can say that the majority is not permitted to positively ask for a relief against the minority though they may eventually get the benefit of the finding of the Company Law Board. To me, it is not correct. The right approach would be to ascertain all the disputes between the minority and majority finally and giving a finding all the disputed facts as otherwise regulating the affairs of the company or putting an end to the matters complained would be difficult.

Keeping the complications and the object of section 397/398 into consideration, the Company Law Board should not insist on technicalities and it can adopt its own procedure as the situation demands and adhering to the principles of natural justice. There should be good logic and strong reason while following any procedure or passing any order by the Board. If there is logic, strong reason and adherence to the object of section 397/398 of the Companies Act, 1956 and principles of natural justice, the proceeding under section 397/398 in any manner would be justified. If technicalities are insisted in a proceeding under section 397/398 of the Act, then, the object can never be achieved and there will not be any end to the litigation. I would like to just extract the observations of Hon’ble High Court of Andhra Pradesh in Sri Ramdas Motor Transport Limited & Others Vs. Karedla Suryanarayana & Others (2002 (48) CLA 113: 2002 (110) CC 193) dealing with the application of Civil Procedure Code and the principles of natural justice in proceeding under section 397/398 of the Companies Act, 1956, as follows:

“It can be safely held that even if the Board is exercising quasi-judicial powers it has to follow not only the rules of procedure prescribed in the Code of Civil Procedure but it can also travel beyond it, in furtherance of cause of justice subject to observance of principles of justice and ordinarily there must be personal hearing and a party must be given an opportunity of putting forth his own case and cross-examining any witness called by the other side. Observance of principles of natural justice operates in areas not covered by any law validly made and they do not supplant the law of land but supplement it. Even assuming that the Board is only an administrative tribunal and need not follow the rules of procedure, in a system governed by rule of law discretion when conferred on the authorities must be confined within defined limits and if a decision is taken without any principle or without any rule, it is unpredictable and such a decision is antithesis to a decision to be taken in accordance with rule of law. Even assuming for a moment that the Board is competent to regulate its own procedure and it has to be guided by the principles of natural justice as conceded by learned counsel, it does not clothe the Board to act illegally, irregularly or irrationally without observing the rudiment of law more so while discharging quasi-judicial functions and it cannot function as it wishes. Any procedure prescribed or followed should be in consonance with the law of the land. It is beyond anybody's comprehension that the Board will deliver orders even without looking into the original records when the petitioners complained that the respondents have fabricated the records, which resulted in miscarriage of justice. Observance of the principles of natural justice does not mean that the Board can pass orders on the basis of xerox copies or typed copies, which were filed before the Board even without attestation.

In the light of the preponderant view of the Supreme Court, I have no hesitation to hold that the order passed by the Board is neither in accordance with the rules of procedure prescribed under the provisions of the Civil Procedure Code nor based on the principles of natural justice. The Board passed the impugned order in a manner unknown to law and in an arbitrary manner apart from the fact that the findings recorded by it on the merits of the case are not only perverse but unknown to adjudicatory process of the land as discussed below. There being an error apparent on the face of the orders of the Board, as pointed out supra, definitely a question of law has arisen from out of the order of the Board to be decided by this court under section 10F of the Act.”

Note: the views expressed are my personal and with great respect to courts.