Simultaneous proceedings under section 397/398?

It is known that section 399 of the Companies Act, 1956 entitles minority shareholders, subject to the qualification prescribed, to approach the Company Law Board (CLB) under section 397/398 of the Companies Act, 1956 seeking relief against the ‘oppression and mis-management’ from the majority shareholders in the Company. As majority shareholders effectively controls the Board through their say in General Body Meetings, the protection to the majority is not envisaged though even the majority can approach the Company Law Board under section 397/398 of the Companies Act, 1956 when they become artificial minority under certain circumstances. There were several principles and precedents developed over the time on the scope of section 397/398 of the Companies Act, 1956 and these proceedings are seen as most complex usually. Though even the liquidation proceedings exercised by the High Court are complex at times, the proceedings under section 397/398 of the Companies Act, 1956 are really complex as the Board would be exercising its power to ‘put an end to the matters complained of’. Dealing with the scope of the provisions dealing with the ‘oppression and mismanagement’ under Companies Act, 1956, the Hon’ble Bombay High Court in Mauli Chand Sharma and another Vs. Union of India and others, (1977) 47 Com Cases 92, has held that:

“chapter II of the Act, which includes section 255, deals with corporate management of the company through directors in normal circumstances, while Chapter VI, which contains sections 397, 398 and 402, deals with emergent situations or extraordinary circumstances where the normal corporate management has failed and has run into oppression or mismanagement and steps are required to be taken to prevent oppression and/or mismanagement in the conduct of the affairs of the company. In the context of this scheme having regard to the object that is sought to be achieved by sections 397 and 398 read with sections 402, the powers of the court under can not be read as subject to the provisions contained in the other chapters which deal with normal corporate management of a company. Further, an analysis of the sections contained in Chapter VI of the Act will also indicate that the powers of the court under sections 397 and 398 read with section 402 can not be read as being subject to the other provisions contained in sections dealing with usual corporate management of a company in normal circumstances. The topic or subjects dealt with by sections 397 and 398 are such that it becomes impossible to read any such restriction or limitation on the powers of the court acting under section 402. Without prejudice to the generality of the powers conferred on the court under these sections, section 402 proceeds to indicate what types of orders the court could pass. Under clause (a) of section 402, the court’s order may provide for the regulation of the conduct of the company’s affairs in future and under clause (g) the courts order may provide for any other matter for which in the opinion of the court it is just and equitable that provision should be made. An examination of the aforesaid sections brings out two aspects; first, the very wide nature of the power conferred on the court, and secondly, the object that is sought to be achieved by the exercise of such power, with the result that the only limitation that could be impliedly read on the exercise of the empower would be that nexus must  exist between the order that may be passed thereunder and the object sought to be achieved by those sections and beyond this limitation which arises by necessary implication it is difficult to read any other restriction or limitation on the exercise of the court’s power. Further, section 397 and 398 are intended to avoid winding up of the company if possible and keep it going while at the same time relieving in minority shareholders from acts of oppression and mismanagement or preventing its affairs being conducted in a manner prejudicial to public interest and, if that be the objective, the court must have power to interfere with he normal corporate management of the company, and to supplant the entire corporate management, or rather, mismanagement, by resorting to non-corporate management which may take the form of appointing an administrator or a special officer or a committee of advisers, etc., who would be in charge of the company”. 

Though I am not going to deal with many issues under section 397/398 of the Companies Act, 1956, it is very important to understand two important pre-requisites to maintain a petition under section 397/398 and those are as follows:

(1)   Minority shareholders approaching CLB should establish clearly that they hold the requisite qualification under section 399.

(2)   Minority shareholders approaching the CLB should establish a prima-facie case though no case gets dismissed now-a-days on the issue of ‘non-establishment’ of prima-facie case as it can amount to giving a finding on the main petition itself at times.

If we keep the qualification issue apart, it is long been settled that ‘an isolated incident’ can not entitle the minority shareholders to approach the Board under section 397/398 of the Act. There are several precedents on the issue though a lenient view is taken now-a-days on the issue of ‘continuity of acts’. Even isolated incident in the Company can lead to the intervention of the CLB under section 397/398 of the Companies Act, 1956 depending on as to how the Board considers the effect of that incident. It establishes a point that there can be issues between the minority and majority which can be settled before any other forum like Civil Court etc. without invoking the jurisdiction of Company Law Board under section 397/398. There can be an issue of enforcement of an agreement between two groups in the Company and that dispute can be settled through a Civil Court or by an Arbitrator if the agreement contains an Arbitration Clause. Thus, if the disputes erupt between the groups in the Company, then, one group may file a Criminal Complaint on the other group, may file a Civil Suit and even can ask for an appointment of arbitrator to look into the disputes if the cause for the dispute is with regard to the ‘enforcement of any specific agreement’.

Res-subjudice & Res-judicata:

The point is as to what is the effect of pending or concluded legal proceedings to the proceedings under section 397/398 of the Companies Act, 1956. Can the Board ignore the findings of concluded proceedings? Can the Board give a different finding on the issue concluded by other forum?. Can the Board ignore the pending legal proceedings between the minority and majority? Etc. The issue of approaching two forums with the same relief and seeking the same relief concluded by the competent forum are dealt-with under section 10 and 11 of Civil Procedure Code, 1908 and those are reproduced below without explanations.

“10. Stay of Suit – No court shall proceed with the trial of any suit in which the matter in issue is also directly and substantially in issue in a previously instituted suit between the same parties, or between parties under whom they or any of them claim litigating under the same title where such suit is pending in the same or any other Court in India having jurisdiction to grant the relief claimed, or in any court beyond the limits of India established or continued by the Central Government and having like jurisdiction or before the Supreme Court.”

“11. Res Judicata – No court shall try any suit or issue in which the matter directly or substantially in issue has been directly or substantially is in issue in a former suit between the same parties, or between the parties under whom they or any of them claim, litigating under the same title, in a court competent to try such subsequent suit or the suit in which such issue has been subsequently raised, and has been heard and finally decided by such court.”

These two principles are so important in a proceeding under section 397/398 of the Companies Act, 1956 though now-a-days it is rare to see a litigation pending in a Civil Court between the minority shareholders and majority or the Company. Certain settled legal principles like Res subjudice and Res judicata are to be followed by any judicial authority or quasi-judicial authority as it is supported by sound logic. This is similar to the ‘principle of natural justice’. However, application of these principles to the proceedings under section 397/398 of the Companies Act, 1956 are most complex and the Board exercises lot of discretion in this regard making a balance between the settled legal principles and the object of section 397/398.

Simultaneous jurisdiction:

Explaining a to how the shareholders are entitled to approach Civil Court or Arbitrator at times and as to how the CLB too has power to look into the issue, the Court in CDS Financial Services (Mauritius) Limited Vs. BPL Communications Limited and others, (2004) 121 Comp Cases 375, has held that:

“when there is no express provision excluding the jurisdiction of the civil courts, such exclusion can be implied only in cases where a right itself is created and the machinery of enforcement of such right is also provided by the statute. If the right is traceable to the general law of contracts or it is a common law right, it can be enforced through the civil court, even though the forum under the statute also will have jurisdiction to enforce that right. Sections 397, 398 and 408 of the Companies Act, 1956, do not confer exclusive jurisdiction on the company court to grant reliefs against oppression and mismanagement. The scope of these sections is to provide a convenient remedy for minority shareholders under certain conditions and the provisions therein are not intended to exclude all other remedies”.

Possible misuse:

With the simultaneous jurisdiction and shareholders having a scope to approach Civil Court or Arbitrator and also approach CLB at times, there is a possibility for converting the jurisdiction of CLB under section 397/398 to that of a Civil Court. It is very much possible as even isolated incidents are considered under section 397/398 of the Companies Act, 1956 though it depends upon as to how the CLB views it.  Though it was a case of exercise of powers by Company Court, dealing with the similar issue, the Court in B.Ramachandra Adityan Vs. Educational Trustee Co. (P) Ltd and another, (2003) 5 Comp LJ 413 (Mad), has held that:

“It is, no doubt, true that the scope of the civil suit is different as the proposed suit is one under the general law and the scope of the company petition is different. But, it will not be open to convert the proceedings in the company Court, which are summary in nature and to use the finding arrived at in the summary proceeding, if it is favourable to the petitioner, in the civil proceeding. It is in the sense that the proceedings under the company law are an abuse of the process of the court and it is well settled that the proceeding herein can not be used for some oblique or some extraneous purpose”.

Striking a balance:

Dealing with the issue, the Company Law Board in RDF Power Projects Ltd. and others Vs. M.Murali Krishna and others, (2005) 4 Comp LJ 97 (CLB), has held that:

 “the object of section 10 of the Code of Civil Procedure 1908, is to avoid conflicting decisions of two competent courts over the same matter and save the time of the court, where the subsequent proceedings are initiated in the same matter. By virtue of section 10, a court shall not proceed with the trail of a suit in which the matter is directly and substantially the same as the one in issue in a previously instituted pending between the same parties or parties under whom they claim to litigate under the same title. The following are essential conditions for application of the provisions of section 10:

(a)    There must be two pending suits on the same matter.

(b)   These suits must be between the same parties or parties under whom they or any of them claim to litigate under the same title.

(c)    The matter in issue must be directly and substantially the same in both the suits.

(d)   The suits must be pending before the competent court or courts.”

Further, the Board has observed that “in the light of the provisions of section 10, the subject matter involved both in the Civil Court and the Company Law Board must be examined”. Further, the Board went on observing that “a careful analysis of the issues both before the Civil Court and the Company Law Board would indicate that the whole of the subject matter in these proceedings is not identical. Section 10 is not attracted if one or some of the issues are in common as held by the courts in a number of decisions. The entire subject-matter of the company petition is not covered by the previously instituted suit. It is free from doubt that there is no substantial identity of the subject-matter before the Civil Court and the Company Law Board. The only issue before the Civil Court is in regard to the right of the second applicant to continue in the office of the managing director of the company. As a result the petitioners shall not interfere in the functioning of the company. Thus, none of the other contentious issues raised in the company petition is before the Civil Court. Therefore, the decision of the Civil Court will not definitely affect the decision in the present company petition, save the continuance of second applicant as the managing director, in which case it can not be said that the matter in issue is directly and substantially is the same in both the proceedings. Section 10 would only apply, in my view, where the decision in previous suit will definitely affect the decision in the later proceedings. Moreover, sections 397 and 398 provide adequate relief to the aggrieved members on account of the possible oppression by the majority and a Civil Court can not usurp the powers of a Company Court, whose jurisdiction brings from an enactment of Parliament and adjudge common law rights on a prior consideration”.

Conclusion:

1.     The CLB can certainly look into the concluded proceedings, but, can not give a different finding on the same issue concluded by a Competent Court.

2.     The Petitioners approaching the CLB can refer to the concluded proceedings; however, the petitioners may not be able to get a relief with the similar or same grievances raised in the concluded proceedings.

3.     Irrespective of pendency of any proceedings between the majority and the minority, the CLB can entertain a petition under section 397/398 of the Act and the CLB will take an appropriate decision as to the issue of grant of relief or the maintainability of a petition under those circumstances.

4.     When it comes to the issue of applicability of settled legal principles like Res Judicata or Res Judice, the CLB will exercise its discretion based on the facts of the case and no hard and fast rule can be laid in this regard.

Note: The views expressed are my personal.