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7/16/12

Petition under section 397/398 - Subsequent events - Scope?


Section 397/398 of the Companies Act, 1956 provides relief to the minority shareholders against the oppressive actions of the majority and the mis-management in the company. Section 399 of the Companies Act, 1956 deals with the issue as to who can approach the Company Law Board (CLB) seeking relief under section 397/398 and other connected provisions. Section 399 of the Companies Act, 1956 is reproduced below:

“Sec. 399     -     Right to apply under sections 397 and 398.
(1) The following members of a company shall have the right to apply under section 397 or 398:

(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

(2) For the purposes of sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.

(3) Where any members of a company are entitled to make an application in virtue of sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

(4) The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Company Law Board under section 397 or 398, notwithstanding that the requirements of clause (a) or clause (b), as the case may be, of sub-section (1) are not fulfilled.

(5) The Central Government may, before authorising any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Company Law Board dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.”

Though oppression and mis-management have been dealt-with separately under section 397/398 of the Act, those are inter-connected and it is settled that a composite petition is maintainable under section 397/398 of the Companies Act, 1956. In a petition under section 397/398 of the Companies Act, 1956, petitioners usually seek relief under section 111A and also under section 237 of the Companies Act, 1956 seeking investigation into the affairs of the Company. Section 402 of the Act details as to the powers of the Company Law Board under section 397/398 of the Act, however, it is settled that section 402 can not limit the powers of the Company Law Board under section 397/398. In the light of the fact that it is very difficult for anyone or even the minority shareholders to get a relief from a Civil Court on disputes between the majority and minority shareholders in view of the inordinate delay in courts and lack of expertise, CLB is the only hope for the minority shareholders to get their interests in the Company protected. Minority shareholders can approach the Central Government seeking intervention, but, the Government rarely entertains such pleas. There is criticism from various stake-holders at powers being exercised under section 397/398 of the Act and the criticism, in brief, is as follows:

From minority:

·        The relief provided under section 397 and 398 is not effective.
·        CLB too insists on technicalities.
·        There is a delay in conduct of proceedings even before CLB.
·        There are problems with the execution of orders.

From majority:

·        Section 397/398 of the Companies Act, 1956 is often mis-used and a false petition can have disastrous effect on the growth and survival of the Company at times.
·        The minority shareholders take advantage of technicalities and gets relief even though equity is not in their side.
·        As the CLB entertains petitions under section 397/398 loosely without looking at the merits and keeps the petition pending, the majority or the company can suffer irreparable damage.

Despite criticism, one should understand that the CLB performs very difficult functions under section 397/398 of the Companies Act, 1956 and the CLB should balance the interests of the minority with the rights of the majority to have a say in the administration of the Company. The delay in disposal of petitions is caused due to the complexity of proceedings under section 397/398 of the Companies Act, 1956 and it would be very difficult to dismiss the petition prima-facie without ascertaining the facts as section 397/398 is meant to protect the interests of the minority shareholders. According to me, if we look at the precedents earlier and the orders of the Board, too much technicalities were stressed and followed. I think that it is not the case anymore and the CLB is guided with the ‘principles of natural justice’ and it will endeavor to ascertain the actual state of affairs in the Company and try to put an end to the matters complained of if oppression or mis-management is proved.

We usually see petitions under section 397/398 of the Companies Act, 1956 in-respect of closely held companies or companies substantially owned by three or four groups. Listed companies are supposed to follow many more guidelines of SEBI as everyone knows in addition to the provisions of the Companies Act, 1956 and also listed companies are mandated to do many things periodically in view of the detailed listing-agreement with the concerned stock-exchange/s. Once disputes erupt between the groups in the company, it would be extremely difficult for them to go-back to the earlier trust-mode. That’s why, many petitions under section 397/398 of the Companies Act, 1956 are settled with one group coming out of the company during the proceedings before the Board itself. Otherwise, one group may be requesting the Board to direct the majority to buy the shares of the minority on a fair value and the valuation is also a bigger exercise before the Board.

Taking note of subsequent events:

If we come-back to the issue, petitioners approaching the Company Law Board under section 397/398 of Companies Act, 1956 are supposed to provide full particulars in their petition. The High Court of Calcutta in Clive Mills Co. Ltd,       (1964) 34 Com Cases 731, has held that “in an application under sections 397 and 398 where fraud, mismanagement, misappropriation or other improper conduct is alleged, full particulars must be set out in order to enable the party charged to understand what he is charged with and also to enable him to answer such charges”.

Once the trust-deficit comes between or among the shareholders and especially in closely-held or family companies, one group tries to out-smart other through various tactics and in most of the cases, this tendency is continued irrespective of the pendency of petition under section 397/398 of the Companies Act, 1956 before the Board. It may be difficult to everyone to play with the order of CLB, but, the majority can continue with their oppressive actions against the majority even when the minority pleads relief before the Board. Under these circumstances, if the minority is asked to follow the technicalities by amending the petition which involves further procedure and which delays the relief, it is possible that the minority shareholders may suffer irreparable loss. It may also not possible for the minority shareholders to opt for amendment of the petition again and again, if that is the procedure, the minority shareholders can only be focusing on amending the petitions when their rights or interests in the company are being seriously compromised in the hands of majority. It may be enough for the petitioner to file a detailed affidavit before the CLB bringing the developments to the notice of the Board and the Board may take note of it and pass orders immediately in the interests of the minority or may ask clarification from the majority shareholders. It is very important for the CLB to take note of even the subsequent developments in the company as ultimately the interests of the minority should be protected and the CLB is supposed to put an end to the matters complained of if the allegations are proved to be right.  According to me, the CLB can take note of all subsequent events upto the date of final hearing or disposal of the petition. However, taking a contrary view, the Calcutta High Court, in Mohta Bros.(P) Ltd. and others Vs. Calcutta Landing and Shipping Co. Ltd. and others,(1970) 40 Com Cases 119, has held that “when dealing with a petition for relief from oppression or mismanagement made under sections 397 and 398 of the Companies Act, 1956, the court must confine itself to the case as made out in the petition and to the allegations made therein and the supporting affidavits and not look at other evidence with regard to events that might have happened subsequent to the petition”.

Similarly, making a distinction between the contents in the main petition and the subsequent events brought on-record, the Company Law Board in Karedla Suryanarayan and othes Vs. Sri ram Dass Motor Transport (P) Ltd. and others (1998) 1 Com LJ 342 (CLB), has held that “a section 397/398 petition has to stand on its own on the basis of the allegations contained in the petition. Subsequent events brought on record alone, in case the main petition fails on merits, can not entitle a person to any relief. In case, the allegations in the main petition are proved, then the subsequent events may be taken into consideration by the Company Law Board in moulding suitable reliefs. Since, on most of the occasions, when subsequent events are sought to be brought on record either through an amendment to the main petition or through an application, certain interim reliefs are also sought for, as happened in this application. Since in such cases, the main petition itself would be pending and that there would have been no occasion for us to find out whether the petitioners have made out a case for grant of relief thereof, any interim relief prayed for in such applications containing subsequent events could only be related to maintenance of status quo in regard to the affairs of the company. No relief which would upset the status quo can be granted when the allegations in the main petition are yet to be assessed by the Company Law Board. Thus, on the issue of subsequent events, it is held that there is no bar in subsequent events being brought on record and being considered by the Company Law Board also, but such consideration would be only to mould the relief to be granted in case the petitioner succeeds in the main petition and that any interim relief granted, based on subsequent events, would be limited to status quo being maintained in regard to the affairs of the company”.

In Jer Rutton Kavasmaneck and others Vs. Gharda Chemicals Ltd. and others, (2001) 106 Com Cases 24, the Court has held thatin a petition for relief under section 397 of the Companies Act, 1956, it is permissible to bring on record by amendment not only the facts pertaining to the events up to the filing of the petition but also subsequent events. Once the court comes to the conclusion that the petition is maintainable then subsequent events can also be considered in order to do complete justice between the parties and to make appropriate orders for removing the oppression”. This is a case where the Court has made it clear that the subsequent events can be brought on-record in a proceeding under section 397/398 of the Companies Act, 1956, however, refers to ‘amendment’.

Supporting the point that subsequent events should also be looked into under section 397/398 of Companies Act, 1956, the Calcutta High Court in Promode Kumar Mittal and Others Vs. Southern Steel Ltd. and others, (1980) 50 Com Cases 555, has held that  “the court is to take notice of all the subsequent events to grant reliefs finally after trial in a company matter, and the interim orders passed from time to time by the court in all applications, the meetings held under the chairman appointed by the court, and the resolutions passed by majority shareholders and directors present therein are all relevant”.

In this connection, we should also look at Regulation 24 of Company Law Board Regulations, 1991 and the same is reproduced below:

“24. Power of Bench to call for further information/evidence – The Bench may, before passing orders on the petition, require the parties or any one or more of them, to produce such further documentary or other evidence as the Bench may consider necessary -

  (a) for the purpose of satisfying itself as to the truth of the allegations made in the petition; or

  (b) for ascertaining any information which, in the opinion of the Bench, is necessary for the purpose of enabling it to pass orders on the petition.”

Conclusion:

The reason for the establishment of Tribunals like Company Law Board is to do away with the cumbersome procedure like C.P.C followed by the Court though each provision in the C.P.C is supported by a sound logic. The amendment procedure may be good even before an Arbitrator or Arbitral Tribal which deals with a specific relief. But, under section 397/398 of the Companies Act, 1956, the CLB can pass any reasoned order in the interests of the Company, in the interests of the minority and in order to put an end to the matters complained of. The CLB may pass suitable orders keeping in-view the object of section 397/398 of the Act and it can not confine itself simply to the admission or the rejection of the relief sought in the petition. As such, events subsequent to the filing of petition under section 397/398 of the Companies Act, 1956 should be considered by the Board without insisting too much on technicalities as otherwise, the entire purpose of section 397/398 would be defeated according to me.

Note: the views expressed are my personal. 

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