CLB: Procedure before CLB in a proceeding under Section 397/398 and applicability of the provisions of C.P.C?

There was a specific objective behind section 397/398 of the Companies Act, 1956 and a great responsibility is cast upon the Company Law Board to protect the interests of the minority shareholders, to put an end to the matters complained of and to regulate the affairs of the Company. The absence of an effective remedy to address the serious grievances of the shareholders in the Company will directly impact the growth of corporate world. We know growth and contribution of Private Limited Companies and Small Enterprises in our economy rather the big listed Public Companies. To the extent possible, differences between the shareholding groups in any Company is to be addressed and every effort is to be taken to ensure that the Company functions smoothly rather resorting to winding-up. The same is the object behind constitution of BIFR and section 391 to 394 of Companies Act, 1956. It is more important to protect the interests of the shareholders in a Company and it is very important to deal with the issues of oppression and mis-management. Some feel that the remedy provided under section 397/398 of the Companies Act, 1956 is not effective and some plead that the unscrupulous are abusing section 397/398 of the Companies Act, 1956 and tries to create numerous problems to the controlling majority in the Company. While it is true that in few cases, a negligible minority tries to abuse the remedy under section 397/398 of the Companies Act, 1956; in many cases the minority feels that their rights are not property and effective protected under section 397/398 of the Companies Act, 1956. A proceeding under section 397/398 of the Companies Act, 1956 is really complicated and as usual there exist difficulties when it comes to execution of an order. It was really shocking to me to see the parties before the Company Law Board pleading pure technicalities without any logic and fair play and we can find judgments stressing on provisions of C.P.C etc. But, as I opine always, there was a change in the manner in which the proceedings before the Company Law Board under section 397/398 of Companies Act, 1956 are entertained. Technicalities are ignored now and there is enough proof for this. Now, petitions questioning maintainability of petitions under Section 397/398 of the Companies Act, 1956 are not taken seriously at the inception. There were judgments saying that even in the absence of clear oppression and mis-management, nothing prevents the CLB in passing orders in the interests of the shareholders. Barring the part of execution and the issues of contempt, now, I am sure that the aggrieved can definitely get a relief in a proceeding under section 397/398 of the Companies Act, 1956 and it is difficult to misuse the process.

The important aspect of a proceeding before the Company Law Board is about the procedure and the applicability of the provisions of Civil Procedure Code. The intention behind constitution of Special Tribunals is to simplify the procedure and to avoid the enormous delay in Courts due to strict applications of provisions of Civil Procedure Code. Despite all this, technicalities were pleaded in a proceeding under Section 397/398 of the Companies Act, 1956 very often. I firmly believe that the CLB can follow any reasonable procedure in a proceeding under section 397/398 of the Companies Act, 1956 in adherence to the principles of natural justice, fair play and in adherence to the object of the provision. In a recent judgment under section 10 (F), the Hon’ble Madras High Court has dealt with the issue some what clearly and it has straight-away addressed the issue of applicability of the provisions of Civil Procedure Code in a proceeding under section 397/397 of the Companies Act, 1956. While dealing with the issue, the Court has considered the difference between the Company Court rules and the regulations of Company Law Board, the amended provisions of Companies Act, the dictum in Needle Industries case, and consequent amendments to the few connected provisions. The Hon’ble Madras High Court, in Company Appeal No.6 of 2009, between K. Muthusamy & Another Vs. S. Balasubramanian & Others, CDJ 2011 MHC 959, was pleased to observe as follows:

“39. The second contention of the appellants is that the law of pleadings and the provisions of the Indian Evidence Act, apply to the proceedings before the Company Law Board. Therefore, the Company Law Board ought not to have taken note of the new pleadings made by the impleaded parties and ought not to have accepted the pleadings made without any evidence.

40. Section 10E (4C) of the Companies Act, 1956, vests with the Company Law Board, the same powers, as are vested in a Civil Court under the Code of Civil Procedure, 1908, for (i) discovery and inspection of documents (ii) enforcing the attendance of witnesses (iii) compelling the production of documents (iv) examining witnesses on oath (v) granting adjournments and (vi) reception of evidence on affidavits. Sub section (4D) of Section 10E declares that the Company Law Board shall be deemed to be a Civil Court for the purposes of Section 195 of the Code of Criminal Procedure. However, sub section (5) of Section 10E states that the Board, in the exercise of its powers and discharge of its functions, shall be guided by the principles of natural justice and shall act in its discretion. Sub section (6) of Section 10E also empowers the Board to regulate its own procedure.

41. Therefore, it is clear that strict rules of pleading and proof, as required in Civil Courts, are not applicable to the proceedings before the Company Law Board. As a matter of fact, the rules of procedure to be followed by this Court as a Company Court are regulated by The Companies (Courts) Rules 1959. Rule 2(4) defines the word "Code" to mean the Code of Civil Procedure, 1908 and Rule 6 of The Companies (Courts) Rules, 1959, makes it clear that the practice and procedure of the Court and the provisions of the Code, so far as applicable, shall apply to all proceedings under the Act and these rules. Rule 6 also states that the Registrar (Registrar of the Company Court) may decline to accept any document which is presented otherwise than in accordance with these rules or the practice and procedure of the Court.

42. In contrast, the Company Law Board Regulations 1991, issued in exercise of the powers conferred by Section 10E(6) of the Act, do not either define the word "Code" or contain a provision similar to Rule 6 of the Companies (Courts) Rules 1959. Regulations 11 to 13 indicate the form and contents of a petition to be filed before the Board. Regulation 14 prescribes the procedure for filing the petition. Regulation 18 makes it necessary to enclose documents as prescribed in Annexure III, to the petition. Regulation 22 requires every respondent before the Board to file a reply to the petition along with the documents relied upon by the respondents. Regulation 38 imposes a bar upon the withdrawal of a petition under Section 397 or 398, without the leave of the Board. Regulation 47 declares that the Bench of the Board will be deemed to be a Court for the purpose of prosecution or punishment of a person who willfully disobeys any order of the Bench. More importantly, Regulation 48 empowers the Board, for reasons to be recorded in writing, to dispense with the requirements of any of these regulations subject to such terms and conditions as may be specified.

43. Thus, the law makers have maintained a clear distinction between the rules of procedure to be adopted by the Company Court under the Companies (Courts) Rules, 1959 and the rules of procedure to be adopted by the Company Law Board under the Regulations of 1991. Not only does Section 10E(5) & (6) confer a discretion upon the Board to regulate its own procedure and be guided by the principles of natural justice, but Regulation 48 goes a step further by empowering the Bench to dispense with the requirements of any of the regulations.

44. In Needle Industries (India) Ltd., the Supreme Court observed as follows:-

"It is generally unsatisfactory to record a finding involving grave consequences to a person on the basis of affidavits and documents without asking that person to submit himself to cross-examination. It is true that men may lie but documents will not and often, documents speak louder than words. But a total reliance on the written word, when probity and fairness of conduct are in issue, involves the risk that the person accused of wrongful conduct is denied an opportunity to controvert the inference said to arise from the documents".

But, it must be remembered that at the time when Needle Industries was decided, sub sections (5) and (6) of Section 10E were differently worded. They were replaced by new sub sections (5) and (6) only with effect from 31.5.1991. Before 31.5.1991, the conduct of the proceedings before the Board was governed by The Company Law Board (Bench) Rules 1975. They were replaced by the Company Law Board Regulations 1991. Therefore, the procedure to be followed by the Board has to be understood in the context of the amended sub sections (5) and (6) of Section 10E and the provisions of the Company Law Board Regulations 1991.

57. Interestingly, the appellants who make a big hue and cry about strict rules of pleadings and evidence have not taken note of the relevant provisions of the regulations. Regulation 22 (2) of the Company Law Board Regulations 1991, enables a respondent before the Company Law Board to file a reply containing such additional facts as may be found necessary for the just decision of the case. Regulation 23 empowers the Company Law Board to give an opportunity to the petitioner before the Board to file a counter-reply to the reply of the respondent, whenever additional facts are pleaded in the reply. Therefore, there is no bar for a respondent before the Company Law Board to plead additional facts. But there is no provision for a contesting respondent to file a counter-reply to the reply of a co-respondent, since the opportunity available under Regulation 23 is actually to the petitioner. However, without sticking on to the dry letter of the law, as always done by persons who have no case on merits, the Company Law Board permitted the appellants herein (who were respondents 2 and 3 before them) to file a reply to the Statements filed by the Receiver (5th respondent). By doing so, the Board actually complied with the letter and spirit of Section 10E (5).”

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