Once the new Companies Act is enacted, companies are supposed to be more vigilant in complying with the corporate regulations and they may have to very often face litigation by the creditors and members before the National Company Law Tribunal. As per the clauses in the new Companies Bill, 2010, the National Company Law Tribunal can entertain applications from any member/s and creditor/s to order investigation into the affairs of the Company. On the same footing, the National Company Law Tribunal can entertain applications raising the issues of oppression and mismanagement even if the members are not holding a qualified percentage of shareholding to file the application. Now, under section 399 of the Companies Act, 1956, members holding 10% shares or any hundred members can file an application under section 397/398 of Companies Act, 1956 and the Company Law Board can pass any orders under section 397/398 of the Companies Act, 1956 in order to put an end to the matters complained of or in order to regulate the affairs of the Company. Once the new Companies Act comes into existence, then, even the members holding only 5% shares can file an application under section 397/398 of the Companies Act, 1956 along with an application asking for exemption from holding the requisite percentage of shares to seek relief on the ground of oppression and mismanagement. However, when it comes to creditor or creditors right to get a relief against the Company directly without investigation, due care is taken in the Act and the National Company Law Tribunal can only pass certain specific orders like restraining to act based on the resolution etc.
Even now, some complain that the provisions of oppression and mismanagement are getting misused and a frivolous litigation is often filed creating enormous problems to the Company or the majority shareholders in the Company. We all know the legal position under section 397/398 of the Companies Act, 1956 and the changes from to time. The changes in the legal position under section 397/398 of the Companies Act, 1956 are as follows:
- Initially, the members are supposed to establish a strict case against the Company for getting relief. It is also known that the oppression alleged should be ‘harsh and burdensome etc.’
- According to me, earlier, the interpretation of section 397/398 of the Companies Act, 1956 was infavour of the majority shareholders in the Company and technicalities were often get emphasized. There are findings that the disputed facts can not be decided by CLB, there is a proposition with regard to ‘consent’ under section 399 and there is so much emphasis on the issue of ‘continuity of the alleged acts’ and also limitations on the powers of CLB has also been frequently highlighted.
- Now, there is no much emphasis on technicalities under section 397/398 of the Companies Act, 1956 and the majority is asked to reply to the allegations in the Petition even if the majority feels that there is nothing in the Petition and it is motivated one.
- I have also read a finding that the CLB can pass orders under section 397/398 of the Companies Act, 1956 even when there is no oppression and mismanagement in ‘stricto senso’.
- When it comes to appeal against the CLB’s order under section 10 (F) of Companies Act, 1956, in the past, much emphasis was laid on ‘substantial question of law’.
- Now, it is settled that perversity becomes the ‘question of law’ and as such if the order passed by the Company Law Board under section 397/398 of the Companies Act, 1956 is contrary to facts or misinterpretation of law to the facts, then, appeal is very much maintainable under section 10 (F).
There are two views when it comes to interfering with the functioning or internal management of the Company. There is a view that nothing happens if liberal interpretation is placed by the adjudicating authority and if the majority in the Company or the Company is asked to supply the demanded information or the copies of the documents. There is another view that the Company maintains secrecy in view of its business interests or in the interests of the shareholders and as such, there should be a strong prima facie case against the Company or the majority in the Company while passing any interim relief under section 397/398 of Companies Act, 1956. These different views on interpreting section 397/398 of the Companies Act, 1956 continues to be there and it will also be continued even after the new Companies Act is enacted.
What normally now happens is that the CLB may easily entertain an application under section 397/398 of the Companies Act, 1956 and without going into the merits of the case, the CLB may ask the majority to supply the information sought by the minority shareholders or the applicants under section 397/398 of the Companies Act, 1956. Not agreeing with such proceeding and liberal process under section 397/398 of the Companies Act, 1956, the Calcutta High Court in AI Champdany Industries Limited & Others Versus Blancatex A. G. & Others, CDJ 2011 Cal HC 557, was pleased to observe as follows:
“Regulation 24 of the said regulations provide the powers to the board to order production of documents, as enumerated above. The qualification for filing an application under Section 397 and 398 of the Act is one tenth of the number of shareholders or 100 members whichever are less or by shareholders representing not less than one tenth of the issued share capital of the company provided that the applicants have paid the entire call amount. (See Section 399 of the Act). Therefore, a small minority of the shareholders of the company can file an application under those sections. Just because such a minority files such an application, does it follow that the company should provide inspection of their documents and provide copies to them, which they were otherwise not entitled to do under the other provisions of the Act and the Code of Civil Procedure and Evidence Act discussed above? Should the Company Law Board upon mere filing of an application exercise its power under regulation 24 asking the company to disclose the documents and provide copies to the applicants?
It is true, that when such an application is decided and is being heard it assumes the character of a proceeding in rem where creditors contributors, the government, the other statutory authorities may become involved. When the proceedings under these sections become open to the world, the affairs of the company are also open to view by the world and the Company Law Board has to pass orders accordingly. At what point of time, does the Company Law Board proceed to pass orders in the nature of those which are prayed for in this application? Our appeal court in Maharani Lalita Rajya Lakshmi M.P. – v – Indian Motor Co. (Hazaribagh) Ltd. and others, reported in AIR 1962 Calcutta 127 cited by Mr. S. B. Mookerjee, learned Sr. Advocate said that refusal to give access to or inspection of the books of account of the company was not oppression as a shareholder had no such right. Allowing such inspection, would, according to the court, be asking the directors to do something they were not obliged to do in law and granting something to the shareholders which they were not obliged to receive. That exposition of law is, in my opinion, very relevant to adjudge whether a company can be compelled to disclose the documents asked for in this case. A case before the Division Bench of the Delhi High Court in Rajdhani Roller Flour Mills Pvt. Ltd. – v – Mangilal Bagri and others, reported in 70 Company Cases, page 788, was cited by Mr. Sudipto Sarkar, learned Sr. Advocate. From the facts narrated in the decision, inspection of documents at the time of witness examination was in issue. In that context and rightly so the court said:
“The Calcutta case, in our opinion, would not apply in the given situation and we express our disagreement with the view that the right of inspection is limited to the board of directors under section 209(iv) and that right is not available to shareholders for inspection of the books of account of the company in the course of proceedings under sections 397 and 398 of the Act.”
Rightly so, because when a Section 397 and 398 proceeding is admitted and heard by examination of witnesses, it becomes a proceeding in rem, as I have said before. Once the proceedings partake of that character the court or the Company Law Board, after satisfying itself that there is a prima facie case can direct the company or persons in control of it to produce documents mentioned in regulation 24 of the Company Law Board Regulation 1991. It should do so only upon such conviction, because the qualification to file this kind of an application is 10% of the shareholders or 100 members whichever is less and shareholders having 10% of the value of shareholding. Then in that case each and every minority group of shareholders can by filing an application under Section 397, 398 compel the company to disclose its affairs to them, contrary to the other provisions of the Companies Act. Such order in my opinion can only be passed after the prima facie case is established. If the prima-facie case is not established then the principles in the case of Maharani Lalita Rajya Lakshmi M.P. – v – Indian Motor Co. (Hazaribagh) Ltd. and others, reported in AIR 1962 Calcutta 127 have to be followed. Furthermore, in my opinion, no such prima facie case was established by the applicants to warrant passing of an order for disclosure of some very secret internal documents of the company.
The following findings of the Company Law Board in its order dated 17th May, 2010 are reproduced herein below:
“14. On the submissions of either side, this Bench decided these applications as follows:
Though the respondents relied upon Mahatab Brothers case and Maharani Lalitha Rajalaxmi case to state that the shareholders are not entitled to the inspection of the documents, whereas the Hon’ble Delhi High Court, Division Bench, in Rajdhani Roller Flour Mills Pt. Ltd. – vs – Mangilal Bagri and ors. – Delhi High Court – DB (1991) 70 Company Cases Page no. 788, held that whenever any member or members filed petition under Sections 397 & 398 of the Act setting out the facts showing prejudice towards either the share holders or the company, they are entitled to inspect the documents relevant to the material facts mentioned in the petition because the documents are necessary to decide as to whether oppression and mismanagement is there or not. Here, in this case, the petitioners specifically stated that the R – 3 i.e. the director of R – 1 Company is none other than the brother of one of the directors of R-5 Company i.e. Jayanta Pujara, it being not disputed by the respondents, it can not be decided at this juncture whether the dealing done is at arms length distance or not unless and until the documents relevant to the dealings are looked into. Thereby the citations relied upon by the respondents are not applicable to the present case. As per Section 300 of the Companies Act, if any director is directly or indirectly interested in the contract or arrangement or dealings of the Company, his presence shall not be counted for the purpose of forming of quorum at the time of any such discussion, and if he `does vote, his vote shall be void. Indeed the director who knowingly contravene the provisions of this section shall be punishable as well, it being the position, R-3 having not disputed that he is brother of Jayanta Pujara who is one of the directors of R-5 Company, for time being it cannot be assumed that the dealing with R - 5 is at arms length distance. It is also requisite to see the documents concerned as to whether he participated in the resolution passed or contracts entered with R-5 Company. Likewise, it being said that the brother of R-3 is a director of ABLICO Company (UK), the same analogy is applicable in this aspect as well. In this scenario, it can not be said that the disclosure sought by the petitioners is not relevant and it also cannot be said that the disclosure is to collect evidence in favour of one party as long as there is cloud of oppression and mismanagement subsisting by the acts of the directors who were cited as respondents 2 & 3, hence, those material facts are very much required for adjudication of this case. Having the petitioners herein asked for inspection over number of documents, this Bench is of the opinion that some of these documents are not required”.
These findings do not show that any prima facie case under Section 397 and 398 has been appreciated by the Company Law Board. The Board, in my opinion, has adopted a wrong approach. The Board was required to see whether the existing pleadings and materials disclosed any prima facie case. In this type of an application, prima facie case means a case, which on the available evidence, has a reasonable likelihood of success at the trial. If such a case was established then it would have been proper, to exercise its powers under the law, to order disclosure of documents. The approach taken by the Board was that the prima facie case was to be established by ordering disclosure of documents, which was erroneous. I make it absolutely plain that the prima facie case to be determined is the prima facie case in the Section 397, section 398 proceedings. Such case has to be determined after filing of affidavits therein, on the available evidence. The appellants, Blancatex and Aldgate have not filed their reply. Their reply is to be filed within two weeks from date. Moreover, I pass this order assuming that the reasons given subsequent to releasing the operative part of the order dated 17th May, 2010 are reasons in support of the order. In this case, there is no point sending back the matter to the Company Law Board, as I had done in the earlier case because the reasons supplied later are also not adequate. Therefore, for mere absence of reasons there is no point in sending the matter back. But, the matter has to be sent back to the Tribunal, for the said reasons, for appreciating the prima facie case of the parties upon giving them a fresh hearing and to consider passing an order for disclosure of documents in the light of the observations made above.”
Discussion on proposed ‘Class Action’:
The proposed provision for class action litigation against the Companies in the new Companies Act is similar to ‘Public Interest Litigation’ or the class action litigation filed under Consumer Protection Laws. I am sure that there can be lot of litigation before the National Company Law Tribunal under the new Companies Act and especially there will be so much litigation asking for investigation into the affairs of the Company and also there will be definite rise in the applications seeking relief against the majority shareholders in the Company. Under the Companies Act, 1956, there was something wrong in the Company, the Central Government can be approached and they are supposed to deal with the illegality or the irregularity. What happens now with the new Companies Act is that the creditor or the members need not approach the Central Government in most the cases and these interested people can approach National Company Law Tribunal easily asking for investigation into the affairs of the Company or asking for relief against the Company subject to the express limitations.
While it is good to keep the companies under check and to make the companies to strictly comply with the corporate regulations, we must also be vigilant at the frivolous litigation and habitual litigants whose job is to litigate and to trouble their opponents. We can find so much habitual litigants now and as such, the National Company Law Tribunal may have to be very careful in dealing with this ‘Class Actions’. I am sure that there will be lot of discussion on this subject by the Constitutional Courts in the course. The ‘Class Action’ against listed Public Companies will definitely be on rise under the new Companies Act as many feel not satisfied with the functioning of SEBI and everyone knows the difficulties in approaching SEBI raising investor grievances and questioning the malpractices in any listed Company.
Note: the views expressed are my personal and a view point only.