Powers of Company Law Board to ascertain information under section 397/398?

Shareholders qualifying under section 399 of Companies Act, 1956 can approach the Company Law Board under section 397/398 seeking preventive and remedial measures against the oppression and mis-management in the Company. Though, section 397/398 is meant to provide relief to the minority shareholders against the actions of the majority, even the majority can approach under section 397/398 of the Companies Act, 1956 and at times, the majority may not be in actual control of the company or the majority becomes artificial minority. It is settled that the petitioner under section 397/398 of the Companies Act, 1956 has to establish a case of ‘oppression & mis-management’ and these events to be continuous and an isolated incident can not entitle the petitioner to maintain a petition under section 397/398 of the Companies Act, 1956. There were many cases which went up to Supreme Court on the issue of maintainability; however, the interpretation on ‘maintainability’ has significantly changed. Even an isolated incident prejudicial to the interests of the minority shareholders can be agitated under section 397/398 of the Companies Act, 1956 now.

The foremost important thing for the minority shareholders approaching CLB under section 397/398 is to prove that there is a prime facie case of ‘oppression and mismanagement’ and other required things are pleaded technically. Any action by the majority in the Company which is prejudicial to the interests of the minority be seen as ‘oppression and mismanagement’ in the Company. In many cases, it is very difficult to establish the case of ‘oppression and mismanagement’ as the minority will not be having any control in the company, access to books of accounts and the information. The minority normally makes-out a case of ‘oppression and mismanagement’ against the majority on the basis of allotment of shares diluting the existing shareholding and on the basis of figures shown in the ‘financial statements’. The minority shareholders normally also depend on the ‘non-filing of returns’ and the required documents with the ‘Registrar of Companies’ in order to make a point that the activity of the management in the Company is suspicious and prejudicial to the interests of the minority. It is very easy for the minority shareholders approaching Company Law Board under section 397/398 to prove their case when the Company is not adhering to the principles of ‘corporate governance’ or due compliance of company regulations.

Even after establishing the prime facie case of ‘oppression and mis-management’, it is the responsibility of the Petitioner approaching CLB to prove the case against the majority in order to get the relief sought. It is very difficult for the minority shareholders to technically establish their point to the CLB as the minority shareholders normally allege that the figures given in the financial statements are not true and are not supported by any documentary proof. It is difficult for the Company Law Board to ascertain the veracity of the figures given in the financial statements unless those are verified by the competent and independent professionals. The majority can be raising many technical objections if the minority wants to further look into the audited accounts. However, unless facts are established and unless the CLB facilitates the minority shareholders to get the required information from the majority, it would be highly difficult for the petitioners to establish their case. Despite all the technical objections, there is no bar on the powers of Company Law Board to pass any order under section 397/398 and under section 403 of the Companies Act, 1956 in order to ascertain the facts and pending the disposal of main Company Petition. Normal rules of Civil Procedure have no application to the proceedings of Company Law Board and the CLB is entitled to pass any order under section 397/398 in order to prevent the continuance of ‘oppression and mismanagement’.

Dealing with a case of order of ‘investigative audit’ in the light of section 237 (b) in a case under section 397/398 of the Companies Act, 1956, in a judgment dated 21.2.2011 in Company Appeal No.6 of 2009 in K.Muthusamy vs S.Balasubramanian, the Hon’ble Madras High Court has observed as follows:

“84. A careful consideration of the statutory provision and the decisions discussed in the previous paragraphs, make it clear (i) that the power under Section 237(b) is administrative in nature, in view of the observations of the Apex Court in paras 10 and 61 of the judgment in Barium Chemicals and in para 3 of the decision in Rohtas Industries; (ii) that the power conferred by the provisions can be exercised even suo motu by the Company Law Board and (iii) that while testing the correctness of an order of the Company Law Board, directing investigation, the powers of the Company Court are restricted to the parameters laid down in the above decisions.

85. Once it is seen that the power is administrative and can be exercised even suo motu, there is no merit in the contention that in a petition under Sections 397 and 398, the Company Law Board was not entitled to appoint an Auditor to conduct an investigative audit. The Company Law Board, before appointing an Auditor, has taken note of the existence of the circumstances, as stipulated by clauses (i), (ii) and (iii) of Section 237 (b). In view of the decision of the Apex Court in Rohtas Industries, I have also examined independently, whether the circumstances pointed out by the Company Law Board existed or not and I am satisfied that they did. Therefore, the fourth contention on the scope of the power under Section 237(b) cannot be sustained.

86. In any case, the Company Law Board has not exercised the power to direct an investigative audit, suo motu in this case. It has done so only on a petition filed by the respondents 1 to 5 herein. The company petition filed by the respondents 1 to 5 herein was not only under Sections 397 and 398, but also under Sections 402 and 403 read with Sections 235 and 237 and Schedule XI. Therefore, all that was required of the Company Law Board was to see whether there were circumstances suggesting the existence of the contingencies stipulated in clauses (i) to (iii), warranting the Board to form an opinion under Section 237 (b). It is clear from the materials on record (i) that the Board actually formed an opinion; and (ii) that the opinion was based upon the parameters prescribed in the three clauses under Sections 237 (b). Since this Court has the power, in view of the decision in Rohtas Industries, to satisfy itself about the existence of those circumstances, I have also independently analysed under question No.3, the existence of those circumstances. Therefore, the contention based on the scope of Section 237 (b) is not well founded.”

The Court has further observed that:

“89. Moreover, the powers of the CLB have to be understood in the light of various provisions of the Act. By virtue of Section 406, the provisions of Sections 539 to 544 are made applicable to proceedings under Sections 397 and 398, in the modified form as set out in Schedule XI. The difference in the language employed is not very substantial. While Section 539 as found in the body of the Act, uses the expression ‘contributory of a company’; Section 539 in Schedule XI, uses the expression ‘member of a company’; Section 539 as found in the body of the Act, applies to a company ‘which is being wound up’; while the corresponding Section in Schedule XI applies to a company in respect of which an application under Section 397 or 398 has been made. Similarly, Section 540 as contained in the body of the Act, applies to a company which is subsequently ordered to be wound up or which subsequently passes a resolution for voluntary winding up. But the corresponding provision in Schedule XI, applies to a company in respect of which an order under Section 397 or 398 is made subsequently.

90. Therefore, it is clear that the powers conferred upon the winding up Court, in relation to ‘antecedent offences’ under Sections 539 to 544, have been extended to proceedings under Sections 397 and 398, by virtue of Section 406, in a modified form as found in Schedule XI. Since the modifications are only cosmetic in nature, it is clear that the Company Law Board has similar powers in relation to proceedings under sections 397/398. In such circumstances, the impugned order passed by the Company Law Board, cannot be said to be vitiated by any error of jurisdiction.”

Note: the views expressed are my personal.