While the intention behind providing preventive and some remedial measures under section 397/398 of Companies Act, 1956 to the minority shareholders is good, the section is misused at times causing enormous loss to the Company or the Majority Shareholders. As everybody knows that section 397 provides relief to the minority shareholders if there is oppression by the majority; and section 398 provides relief to the minority shareholders when there is mismanagement in the Company. While, according to me, what constitutes ‘oppression’ and what constitutes ‘mismanagement’ is subjective, both the sections are cited while the minority seeks relief against the majority before the Company Law Board or NCLT in future. Though, according to me, the Company Law Board can pass any orders under section 397/398 of Companies Act, 1956 in order to put an end to the matters complained of, even other sections of the Companies Act are cited routinely and in most cases investigation into the affairs is also sought for. Listed Public Companies normally do follow all the corporate requirements as it is under scrutiny from SEBI and as the listed companies are bound to comply with the listing agreement entered into with the relevant Stock Exchanges. In India, many family companies or closely held companies do not follow the requirements of the Companies Act, 1956 and it would very often be difficult for an outsider to know as to the status of the Company or even it is difficult for an adjudicating authority to find-out truth.
Many family companies or closely held Private Companies are run upon mutual understanding and when understanding among the shareholders gets shaken, it would possibly lead to litigation. If these companies do not comply with the corporate requirements or the mandatory requirements under the provisions of the Companies Act, 1956, then, it would be difficult for the Company Law Board to ascertain the truth under section 397/398 of the Companies Act, 1956. In these matters, it would be very easy for an applicant or a group of minority qualified under section 399 of the Companies Act, 1956 to be able to make-out a prima facie based on concealments and the Company Law Board may pass interim orders or may give interim directions pending the disposal of the main Company Petition. Whether to grant an ex-parte interim order or grant an interim relief after hearing the parties concerned will depend upon the urgency cited and the style and understanding of the presiding officer about the case before it.
But, depending upon the style of the Presiding Officer, in my opinion, once the interim order or the relief is granted, then, it will remain so until the final disposal of the Company Petition. In my opinion and in view of the stakes involved in many company disputes, when an ex-parte order is granted, then, the matter is again to be heard fully when the opposite party makes an objection to the passing of the ex-parte order.
It is true that it will be very difficult for a presiding officer, according to me, to comprehend the entire case within minutes and immediate understanding is possible only in few cases based on the averments in the Company Petition. And, there can also be a practice to entertain all Company Petitions under section 397/398 of the Companies Act, 1956 saying that all contentious issues can be looked into only during the final disposal of the case. According to me, this is not correct and when there is no prima facie case under section 397/398 of the Companies Act, 1956 upon the bare perusal of the Company Petition, then, there should not be any interim relief and such Company Petitions should be dismissed even without asking the opposite party to file a Counter Statement. But, in practice, only when the maintainability of the petition is questioned on the ground of qualification under section 399, the matter would be looked into and even in this case involving contentious issues like further issue and allegation of fraudulent transfers, the Board would be left with no other option except to get all the contentious matters decided finally and after hearing the version of the opposite parties or the majority shareholders. But, when the majority comes-up with a petition to dismiss the Company Petition under section 397/398 of the Companies Act, 1956 on the ground that it lacks the basic required averments, then, such pleas, according me, are not entertained. There can be no reason as to why a Company Petition under section 397/398 of the Companies Act, 1956 should be pending when there is no prima facie case of ‘Oppression and Mismanagement based on the averments in the Company Petition and the documents filed. The case where the further enquiry is needed can be completely different.
Emphasizing on the need of having a prima facie case, the Hon’ble Calcutta High Court, in A.P. O. T. Nos. 355 of 2010, between AI Champdany Industries Limited & Others Vs. Blancatex A. G. & Others (CDJ 2011 Cal HC 557), was pleased to observe as follows:
“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.”
Note: the views expressed are my personal and a view point only.
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