CLB: CLB’s power to set-aside Agreements/Contracts under section 397/398?

There can be disputes between majority group and minority shareholders in any Company and these disputes come very frequently in closely held companies or Private Limited Companies. The Companies Act, 1956 provides certain rights to the shareholders and any Private Limited Company is supposed act as per its Articles and the provisions of the Act. We are also aware of the principle that if the Articles are contrary to the clear provision under the Act, then, the same is invalid and can not be enforced upon. Closely held Private Limited Companies are very often run as proprietorship concerns or the partnership firms. Despite clear provisions and despite having many assets and good turn-over, a Private Limited Company may not bother to maintain the books, registers and may not bother to file the required forms with the Registrar of Companies. Despite the concept of separate corporate existence and despite the regulations as to how a Company is to be run, we can see agreements between or among groups in a Private Limited Company on the issue of capital and profit sharing. I have seen many cases and many could have seen as to the seriousness of disputes among shareholders and in some cases, the stakes are very high. I have seen some cases, where the shareholders are entitled for a substantial shareholding in many group companies having good value, but, still they are afraid as to whether they get their legitimate share in the Company or not. When a dispute comes between or among the shareholders in a Company, then, it is very easy to hide behind technicalities to deny the legitimate right of other shareholders in the Company and it is also true that at times the majority is being harassed by the minority group relying on technicalities and provisions of the Act. A minority group may take-over the Company through fabricating certain documents and all directors representing majority shareholders may also get removed surprising by uploading few forms with the Registrar of Companies as if those Directors are retired voluntarily. These disputes among shareholders normally come to Civil Court or High Court, and more frequently to the Company Law Board under section 397/398 of Companies Act, 1956. No shareholding group in a Company come to Court for simple things and mis-understandings as it will further frustrate the relationship between the majority and minority group in the Company. It is only when a group of shareholders feel oppressed or aggrieved at the mis-management in the Company, they prefer to approach Court of Law and they normally approach Company Law Board under section 397/398 of Companies Act, 1956 if they are qualified under section 399.

Any litigation before Company Law Board under section 397/398 of the Companies Act, 1956 would normally be complicated. Giving a clear finding is always difficult for the Board under section 397/398 of the Companies Act, 1956 and every effort is normally taken in encouraging the parties to arrive at a settlement or ensuring that a group quits from the Company by selling their shares to other at the price determined by the mutually acceptable mechanism. But, when the two groups are reluctant to find a way out to the dispute between or among them, then, the Company Law Board may give a finding on many issues raised in the Petition with the intention of putting an end to the matters complained of or with the intention of regulating the affairs of the Company. But, if it is constantly litigated by the groups by taking the order of the CLB to the High Court and to the Supreme Court, it will definitely take time and the order may get modified again and again and even the matter in Appeal may get reverted back to the Board for consideration afresh in view of further developments in the Company. These are all the complications under section 397/398 of Companies Act, 1956.

There is a feeling that the remedy before the Company Law Board is not really effective. I do feel that initially technicalities have considerably driven litigation before the Company Law Board and now the approach is slowly changing. We have got many judgments stressing on the word ‘oppression’ and ‘mismanagement’ and as to what are all the requirements to maintain a petition under section 397/398 of the Companies Act, 1956. I have also seen cases where the Courts held that the disputed facts can not be decided by the Company Law Board. But, the approach to the litigation under section 397/398 of the Companies Act, 1956 has slowly changed and now we can find a precedent where it is said that the CLB can pass orders even when ‘oppression’ or ‘mis-management’ is not proved in stricto-senso. We have seen as to how appeals under section 10 (f) are entertained now though the appeal is maintainable only on ‘question of law’. We have seen a good improvement under section 10 (f) that when the order of CLB is perverse, then, the perversity itself becomes a question of law under section 10 (f).

The very important issue according to me under section 397/398 of the Companies Act, 1956 is about the power of the Company Law Board to set-aside agreements or contracts entered into between the Company and the outsiders and as to how to interpret section 402 in this regard. In my opinion, there can not be any restrictions on the Company Law Board in giving a finding with regard to any kind of oppressive or acts of mismanagement on the part of the majority in the Company. Unless a transaction is unrelated to the issue of oppression and mismanagement, the CLB should have authority to look into all issues and should be able to give an enforceable finding. If the CLB says that it can not decide the validity of agreements or contracts in all cases and if it says that any decision on the validity of an agreement or contract requires a trial, then, it will straight away defeat the very object of constitution of Company Law Board and the object of section 397/398 of the Companies Act, 1956. Everybody knows as to what happens if one approach the Civil Court and it’s a fact that finality to a civil dispute may not come even in 10 to 15 years for the obvious reasons. Under these circumstances, if the parties are advised to approach Civil Court under section 397/398 of the Act based on technicalities, then, I am sure that the high stakes of shareholders in the Company are very likely to be affected. For example, if a majority group in the Company manages to sell the valuable assets of the Company to an outsider mentioning very meager price in the Agreement or the Contract, then, the other minority shareholders are straight away gets affected. In these cases, CLB should be in a position to provide effective relief to the minority as otherwise, minority group may seriously get prejudiced. The functioning of Civil Courts and the object of constituting special tribunals requires a concentration in this regard and the Hon’ble Supreme Court, in CIVIL APPEAL NO.3717 OF 2005 between Madras Bar Association Vs. Union of India, was pleased to observe as follows:

“18. The argument generally advanced to support tribunalisation is as follows: The courts function under archaic and elaborate procedural laws and highly technical Evidence Law. To ensure fair play and avoidance of judicial error, the procedural laws provide for appeals, revisions and reviews, and allow parties to file innumerable applications and raise vexatious objections as a result of which the main matters get pushed to the background. All litigation in courts get inevitably delayed which leads to frustration and dissatisfaction among litigants. In view of the huge pendency, courts are not able to bestow attention and give priority to cases arising under special legislations. Therefore, there is a need to transfer some selected areas of litigation dealt with by traditional courts to special Tribunals. As Tribunals are free from the shackles of procedural laws and Evidence Law, they can provide easy access to speedy justice in a `cost-affordable' and `user-friendly' manner. Tribunals should have a Judicial Member and a Technical Member. The Judicial Member will act as a bulwark against apprehensions of bias and will ensure compliance with basic principles of natural justice such as fair hearing and reasoned orders. The Judicial Member would also ensure impartiality, fairness and reasonableness in consideration. The presence of Technical Member ensures the availability of expertise and experience related to the field of adjudication for which the special Tribunal is created, thereby improving the quality of adjudication and decision-making.”.

While it is true that unconnected issues can not be agitated before the Company Law Board under section 397/398 of the Companies Act, 1956, all issues which are part of oppression and mismanagement, are to be decided by the CLB without laying any emphasis on technicalities.

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