Oppression and Mismanagement: Construing ‘consent’ under section 399 of Companies Act, 1956?

Section 399 of Companies Act, 1956 deals with the issue of qualification to file an application under section 397/398 of Companies Act, 1956 seeking appropriate relief when there exists oppression and mismanagement in the Company. The qualification prescribed under section 399 is based on shareholding and also membership. Clause (1) of Section 399 of the Act is as follows:

“399. (1) The following members of a Company shall have the right to apply under section 397 or 398:-

(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.”

Thus, an application under section 397/398 of the Companies Act, 1956 can be representative application too. It need not always be representative as any one or two shareholders can possess more than 10% shareholding in the Company. When it is representative, the members should give their ‘consent’ for approaching the Company Law Board under section 397/398 of the Companies Act, 1956. Many applications are usually filed in respect of closely held companies or family companies and a group is normally led by a prominent member in the group who will take all decisions on-behalf of the group. Under these circumstances, there may not be any problems with ‘consent’. However, where many members join together and consent for filing an application under section 397/398 of the Companies Act, 1956, then, there will be complications. Because, an application under section 397/398 of the Companies Act, 1956 can lead to disastrous consequences in the Company at times. Thus, the members consenting to file an application under section 397/398 of the Companies Act, 1956 should apply their mind to the contents and allegations in the application under section 397/398 of the Companies Act, 1956. Dealing with the issue, the Hon’ble Delhi High Court in Omni India Limited and Others Vs. Balbir Singh, 1989 66 Comp Cas 903 Delhi, was pleased to observe as follows:

“10. The word "consent", according to Webster's Third New International Dictionary, inter alia, means compliance or approval of what is done or proposed by another, acquiescence, permission, capable, deliberate and voluntary agreement to or concurrence in some act or purpose implying physical and mental power and free action. According to Mozley and Whiteley's Law Dictionary, Tenth Edition, "consent" presupposes physical power, mental power and a free and serious use of them. Examined in the light of these meanings and keeping in view the purpose for enacting section 399, we have no doubt, that the expression "consent in writing" used in section 399(3) means conscious approval of the action proposed to be taken by the persons to whom the consent has been given. We are also of the view that the writing itself should indicate that the persons who have signed the consent letters have applied their minds to the question before them and on application of minds have given consent for a certain action. Under section 402 of the Act, the court, on an application under sections 397-398 and without prejudice to the generalities of the powers of the court, can grant several types of reliefs. In this background, it is necessary that the writing must indicate that the members giving consent had applied their minds to the allegations to the made and the reliefs sought to be prayed for in the proposed action and have given their consent for seeking those reliefs. This is apparent from the expression "consent in writing". Had the intention been that the writing should not indicate the application of mind, then there was no necessity for using the term "consent in writing" and mere word "consent" could have been used. To hold that the requisite members can give their consent in writing without applying their minds or without considering the nature of the allegations and the reliefs sought would frustrate the entire purpose of section 399 which prohibits the filing of an application under section 397 or 398 of the Act, inter alia, by not less than 100 members.”

However, who can raise objections to the ‘consent’ and at what stage, is also important in an application under section 397/398 of the Companies Act, 1956. Because, on the ground that the question of law can be raised at any stage, if an application under section 397/398 of the Companies Act, 1956 is dismissed at the final stage applying the legal principles on the issue grammatically, then, it may not be correct. The object of section 397/398 of the Companies Act, 1956 is to be considered in this regard. If the Respondents in the application raise the issue pertaining to the consent in their reply statement or even orally before the Board at the initial stage, then, the petitioning members can convince the Board that all the members have applied their minds to the application. Even in the absence of any allegation and the consequent reply from the applicants, in my view, the Board can insist the applicants to address the issue. It all depends upon the facts and circumstances of each and every case and there can not be any hard and fast rule in this regard. The Board can also allow the consented members to add themselves independently in the application and it is in consonance with the object of section 397/398 of the Companies Act, 1956 keeping the technicalities apart. A member who has consented for filing an application may wish to state his views independently and dealing with such a situation, the Hon’ble Calcutta High Court, in Pramod Kumar Mittal Vs. Andhra Steel Corporation Ltd, 1985 (58) CC 772, was pleased to observe as follows:

“(3) We are further of the opinion that a section 397 application is a representative application in the sense that it is on behalf of 10% of the shareholders which is required to maintain such an application and if those shareholders who had given their consent come to oppose or make any application before the court, they have sufficient locus standi to be heard by the court and as such, in an appropriate case like the present, one has a right to be added as parties in their own names. In this case, inasmuch as Promode Kumar Mittal and other appellants were supporting Mohanlal Mittal in the application under section 397 before the court and inasmuch as Mohanlal Mittal was no longer prosecuting the section 397 application or opposing a particular transaction during the pendency of section 397 application of the Companies Act, we are of the opinion that the present appellants were entitled to be added as parties and not acceding to that prayer, the learned judge was in error.”

Note: the views expressed are my personal and a view point only.