Petition under Section 397/398 – Importance of Prayer – a Case Study

Every one knows the object of section 397/398 of the Companies Act, 1956 and it is to bring an end to the matters complained of and to regulate the affairs of the Company in future. A great responsibility is cast on the Company Law Board under section 397/398 of the Companies Act, 1956 and it is not only an adjudication of dispute between two shareholding groups, but, it is to find ways as to how to put an end to the matters complained of and as to how to regulate the affairs of the Company. Only when it is not possible to put an end to the matters complained of or to regulate the affairs of the Company, the Company Law Board may finally ask one group to leave the Company by selling their shares at a fair price to be determined by the valuers and to be confirmed by the Company Law Board. Only when all these efforts to fail, it is recommended for winding-up of the Company. Several complications are there in a proceeding under section 397/398 of the Companies Act, 1956 and one should be careful while pursuing the remedy, presenting the case in view of the stakes normally involved in any Company. These internal disputes normally come in closely held private companies which operate on the principles of partnership. Strange arrangements can be seen in some closely held Private Companies and in some cases, completely ignoring that the Company is a separate juristic person, stake holders take funds from the Company and also use their personal funds to repay the liabilities of the Company. All these things practically happens in many companies and in view of these complications, giving a finding justifying principles of law and equity, would be a difficult task for the Company Law Board under section 397/398 of Companies Act, 1956. There exist complications in resolving disputes between the shareholding groups when it is a closely held private company in view of complicated internal transactions and arrangements, and there exist complications even in public companies in view of the interests of various stake-holders and the need of adhering provisions of the Act strictly.

Thus, in view of the stakes involved and complications, a proceeding under section 397/398 of the Companies Act, 1956, if pursued, is to be done carefully. Presenting the facts, filing the documents, bringing the additional facts to the knowledge of the Board from time to time, rebutting the allegations, the prayer part and making concessions and everything plays an important role in a petition filed under section 397/398 of the Companies Act, 1956 alleging oppression and mismanagement. I would like to present a case study highlighting at the importance of asking relief in the Petition under section 397/398 of Companies Act, 1956 and the relevant facts are as follows:

1. Two groups, with a clear understanding of business needs, formed a Private Limited Company.

2. In the Group-A there are two shareholders and from Group – B there are three shareholders.

3. Shareholders from each group has acted as promoters of the Company and subscribed to the Memorandum and Articles.

4. After incorporation, the groups had clear arrangements to run the Company and they have jointly taken the business decisions and operated Bank Accounts of the Company.

5. The business went on smoothly for some time and after few years; there was mistrust between the two groups. Group A is holding 40% shares in the Company while the Group B holds 60 % of shares.

6. The Group-B, being the majority, has taken certain business decisions without consulting Group-A. Certain resolutions were passed allegedly without informing Group-A.

7. At one point of time, Group-A has decided to come-out of the Company or to get the Company back to track without any mismanagement or prejudice to the members.

8. Group-A has filed a Petition under section 397/398 of Companies Act, 1956 against the Company and by making Group-B as parties to the proceeding.

9. In the Petition, Group-A has focused mainly on two issues viz., buying the shares of the majority at a fair price or in alternative, the majority should buy their shares at the fair price so that one group will ultimately be out of the Company and there will not be any problem in the Company.

10. In a proceeding before the Company Law Board, the Petitioner could establish that decisions were taken without any meeting, no minutes were maintained, financial statements are not filed, registers as required is not maintained and all these issues are further confirmed by the Commissioner appointed by the Company Law Board to authenticate the Books of Account of the Company.

11. In the final order of the Company Law Board in a petition filed by Group-A, the Company Law Board has come to the conclusion that the trust between groups is completely lost and as such though the Group-A could establish his case clearly, the Board has asked the Group-A to sell their shares to Group-B in view of the prayer sought.

Analysis:

In the above case, there could not have been any prayer for direction to the majority group to buy the shares of the Petitioner as it is not the intention of the Petitioner at all. The intention of the Petitioner is to get the disputes resolved and nothing more. Being the promoter of the Company, being the contributor of the Company’s growth and the being the victim of oppression and mismanagement by the majority and having established the case, the Petitioner may not want to quit form the Company, but, it is difficult to turn the order back in view of the relief sought in the Petition. These are all the complications with few simple things. Even in the absence of prayer relating to exit, the Company Law Board will consider all those options and submissions can be made at any time before the Board in the course of the proceeding. A good case of Group-A, the Petitioner, is being weakened in view of the specific prayer sought in the Petition. Even if the order is appealed, as the Group-A has expressed his willingness to exist specifically in the prayer, the same will be taken note of. In the absence of such a prayer and in the light of proving all the facts like no meetings, fictitious resolutions, no registers etc., Group-A could have pressed for preventive and remedial measures and infact, could have pressed for buying the shares of majority as there can not be any hard and fast rule in a proceeding under section 397/398 of Companies Act, 1956. A simple or may be, inadvertent mistake can really cost a lot and a relief under section 397/398 of the Companies Act, 1956 is to be carefully pursued and one should imagine the work-load of Company Law Board in remembering many issues and reading bulk of papers in each and every case. It may not be practically possible for any adjudicatory authority to read all the facts or re-collect all the facts pertaining to a case and especially in a case like oppression and mismanagement.

Note: the few facts highlighted do not represent any case I have represented or came to know and the facts are presumptive. The intention is to highlight the significance of ‘relief’ in a petition alleging oppression and mismanagement and nothing more.