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. 

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 that “in 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. 

Oppression & Mismanagement: Many Interim Applications & dismissals and orders?

It is known that proceedings under section 397/398 of the Companies Act, 1956 are always complicated. There will often be criticism that the jurisdiction of Company Law Board (CLB) under section 397/398 of the Companies Act, 1956 is being misused. At the same time, there is criticism on the effectiveness of the jurisdiction being exercised by the CLB in order to prevent oppression and to put an end to the matters complained of. In many cases, the CLB may not be able to come to a quick conclusion as to what is going-on in the Company and the CLB may hesitate to pass drastic orders against the Company unless it is convinced of the issues after listening to the Company or the majority in the Company. Any adverse order against the Company will have its own implications and the functioning of the Company and the business prospects may also come to standstill at times with the proceedings of the Company Law Board. While the non-adherence to corporate governance and the technical issues are pitched against the Company, the CLB may not be able to pass any orders based on mere non-compliance of statutory provisions of law. The CLB often looks at equity and in some cases; the CLB may have to look at complicated legal issues and variety of arrangements among shareholders or the groups in the Company.

When a group comes to Company Law Board alleging oppression and mismanagement against the majority in the Company, and if the two groups see no scope for compromise, then, there will be hectic and continuous litigation in-respect of the affairs of the Company. When the issue of oppression and mismanagement is contested strongly, then, the minority or the petitioners may be presenting several interim applications praying the Company Law Board to direct the majority not to exercise any powers which will affect interests of the minority pending litigation. Under section 397/398 of the Companies Act, 1956, any number of interim applications can be filed and in order to put an end to the matters complained of, the CLB is empowered to pass any orders within the purview of settled legal principles with regard to the powers of Company Law Board under section 397/398 of Companies Act, 1956.

There may be a case where the minority presents the petition with limited facts and the minority may come to know several issues after filing of the Company Petition and it is very much possible. As and when the information comes, the minority can also be changing their stand and may want to take advantage of the fresh details. This ground reality in respect of many closely-held companies or the family companies, makes the functioning of Company Law Board very complicated. It is very difficult for the Board, at times, to pass orders in a proceeding under section 397/398 of the Companies Act, 1956. In most of the cases, the Company Law Board encourages the warring groups for an amicable settlement and in some cases, the effort will be on convincing a group to buy another group and so that the deadlock ends.

It would also be extremely difficult for the Company Law Board to go through all the facts presented, the counter statements, and the proceedings. Thus, except in simple cases, the disposal of company petition under section 397/398 of the Companies Act, 1956 takes time. Again, an interim order passed by the Company Law Board under section 397/398 of the Companies Act, 1956 is an appeallable order on some grounds under section 10 (F) of the Act. Rather the final proceedings of the Board in a petition under section 397/398 of the Companies Act, 1956, the interim proceedings will often leads to much litigation. There is no bar on the petitioners to present interim applications from time to time though the interim applications were dismissed initially saying that there is no prima facie case. Nothing prevents the Company Law Board to take any new facts presented in the course of the proceeding and pass orders. There may be a technical thing that if the petitioners want to plead any additional facts, the main Company Petition should accordingly be amended. In my opinion, all these technicalities can be ignored by the Company Law Board under section 397/398 of the Companies Act, 1956. Technicalities are time consuming and in my opinion, technicalities can be ignored in a proceeding under section 397/398 of the Companies Act, 1956 to the extent possible.

Case Study:

Below is the extract of a judgment rendered by the Calcutta High Court and it is a wonderful case for consideration. In this case, some interim applications were dismissed by the Company Law Board initially saying that there is no prima facie case. Thereafter, the petitioner has also brought certain fresh details to the knowledge of the Company Law Board and sought further interim orders. The CLB, at the second instance, convinced of passing a detailed interim order or directions and the same is challenged to the High Court and there the Appeal is partly allowed. The main issue discussed in the following judgment is like:

“Can the Board allow interim applications and give directions to the Respondents if the Board initially rejects all the interim applications filed by the Petitioners under section 397/398 of Companies Act?”

The extract of the judgment delivered by the Calcutta High Court on 16.09.2011, in ACO No. 71 of 2011, between BIRLA CORPORATION LTD vs. BIRLA EDUCATION TRUST & ORS, is as follows:

“6. The proceeding before me is at the interim stage only and on behalf of the appellant, that is the company, prayer has been made as an interim measure, for stay of operation of Paragraph 85(vi) of the order, pending final decision in the appeal. On behalf of the appellant, it has been submitted that the transactions of the company under the CBLO and MIBOR were all valid transactions. It has been argued that the CLB has committed jurisdictional error in passing the order under Section 402 of the Act, as the scope of interim order under Act is required to be passed in terms of Section 403 of the Act only. The other ground on which I have been addressed is that in the order passed on 9th February 2011 the CLB had come to a finding that there was no prima facie case of mismanagement, and no subsequent event had taken place which required the CLB to take a diametrically opposite stand in C.A. No 302 of 2011. In this regard, the learned Counsel for the appellants sought to attract the principle of res judicata.

7. On behalf of the respondent no.7, supporting the appellants, it was contended that it was impermissible on the part of the applicants to come with an interlocutory application with the factual allegations at variance with the pleadings that form foundation of the original complaint contained in the main company petition. The main case of the respondent nos. 1 to 6 being the applicants before the CLB is that when the company petition was filed, the notice for postal ballot seeking to drastically alter the main business line of the company was not in existence, and the annual report of the company containing the accounts for the year 2010-2011 was also not available. It was contended that the applicants came to learn the details of CBLO and MIBOR transactions subsequent to 9th February 2011. Further submission on behalf of the respondents/applicants has been that these subsequent acts on the part of the company formed part of a chain of activities resulting in mismanagement of the affairs of the company which were oppressive to the minority shareholders, and such subsequent facts could be brought to the notice of the CLB by filing an interlocutory application in the subsisting proceeding, and for each of these acts, filing of a fresh petition was not necessary.

8. On the latter point, that is whether a new petition was required to be filed or not, the CLB, in the last paragraph of the order, i.e. paragraph 85(vii) has issued direction which is in the nature of direction for amendment of the original company petition. On behalf of the appellant, the legality of such a direction was questioned. But that issue I propose to deal with at the stage of final hearing of the appeal. In this order, I shall confine my scrutiny to the directions contained in paragraph 85(vi) of the order impugned, by which investigation of the dealings of the company to ascertain profits made through such dealings by the company and Lodha Capital Markets Ltd., PLC Securities Pvt. Ltd. and others through whom such transactions were done, has been directed by an outside audit firm, Ernst & Young. The appellant has questioned the choice of the audit firm also, on the ground that the said firm does audit work for several companies belonging to different branches of the Birla Group, being the industrial house having presence in several areas in the corporate sector of this country. This issue was raised as there are several proceedings pending in different forums in which the members or associates of the said family and the respondent no.7 are involved over a dispute relating to grant of probate of the will of Priyamvada Devi Birla (since deceased), who had controlling interest in several companies and other entities of a branch of Birla Group known as the M.P. Birla group. The appellant company also belongs to the said M.P. group. Though in the main company petition the authority or power of the respondent no.7 over the estate of said Priyamvada Devi Birla, which includes 62.9% of the shareholding of the appellant company has been questioned, before me at this stage arguments have been primarily presented on behalf of the applicants as minority shareholders having grievance over the acts of the majority, which they consider oppressive and prejudicial to their interest, interest of the company as also public interest.

9. As I have already discussed in the earlier part of this order, there have been interlocutory proceedings in the past among the same parties on the allegations of mismanagement and oppression and plea for various interim reliefs was turned down by the CLB in the order passed on 9th February, 2011. The instant application, i.e. C.A. No.302 of 2011 was filed on the ground of occurrence of certain subsequent events to which I have also referred to earlier in this order. So far as proposal for alteration of the memorandum of association of the company is concerned, if the resolution was carried through, that might have had resulted in unalterable situation so far as the activities of the company is concerned, and I shall test the legality of that issue at the stage of final hearing of this proceeding. But the CLB has already directed not to give effect to the said notice for postal ballot and stay of operation of that part of the order has not been pressed before me at the interim stage by the appellant. If the postal ballot notice is not given effect to, in the light of the earlier order of the CLB and its observations made in the said order passed on 9th February 2011, can the order for audit investigation in the manner directed be justified?

10. In my opinion, within such a short span of time the Company Law Board ought not to have come to an altogether different finding at the prima facie stage so far as it directed investigation into the dealings of the company in the money market. In my opinion, the events subsequent to 9th February 2011 would not have justified formation of fresh opinion, even at prima facie level, requiring investigation into the financial dealings of the company. Such financial transactions seemed to be going on since 2008-09. Substantial argument was advanced on the legality of the transactions conducted through CBLO and MIBOR. The other complaint made was rapid frequency of the transactions in relation to the investments of the funds of the company, which according to the applicants did not constitute investments made by a company of its surplus funds in normal course, but constituted trading in financial products. But the CLB has not come to any finding that such transactions are impermissible or cannot be entered into by the company on the ground that such dealings would constitute dealing in financial products, at present not mandated by its memorandum of association. As transactions of this nature had been going on when the earlier order was passed by the CLB, in the absence of there being any fresh finding that these transactions were illegal, I do not think, prima facie, an investigation by an outside agency is warranted at this stage.

11. On behalf of the applicants, it was submitted that the order passed on 9th February 2011 was not sustainable in law and the observations and comments made in the said order ought not to be given credence to by this Court. The appeal against that order has also been assigned before me and I am hearing that appeal. I am not making any observation in this order as regards the legality of the order passed on 9th February 2011. But so far as the CLB is concerned, I do not think subsequent facts justified directing investigation into the dealings of the company when the Board itself had opined earlier that the applicants had not made out any prima facie case.

12. It was brought to my notice in course of hearing that the order passed by the CLB on 9th February 2011 and 17th June 2011 were by different members of the Board. But I do not think on a subsisting set of facts the CLB ought to take different view through different members in different interlocutory proceedings arising out of a single company petition.

13. It was also submitted on behalf of the applicants that such investigation would not in any way prejudice the company. Mere fact that a particular direction would not prejudice a company would not justify passing an order directing something to be done which in normal course would not be permissible.”

Source: www.indiankanoon.org.

Note: the views expressed are my personal and a view point only.

Oppression & Mismanagement: Proceeding against subsidiaries under section 397/398 of Companies Act, 1956?

It is very frequently alleged that the remedy available to shareholders under section 397/398 of the Companies Act, 1956 is not effective. There are several issues to say as to why the remedy available to the shareholders under section 397/398 of the Companies Act, 1956 is not effective. Execution of orders passed by the Company Law Board under section 397/398 of the Companies Act, 1956 is always complex and many times, the parties defy the orders and defend their actions in the course of the proceeding. While the shareholders mention urgency while seeking some interim measures or the disposal of the Company Petition under section 397/398 of the Companies Act, 1956, the Company Law Board often emphasizes the ‘principle of natural justice’ and will also say that the disposal of Company Petition will be done priority-wise. Apart from these usual issues, there are several complicated issues under section 397/398 of the Companies Act, 1956. Now, the issue of maintainability of the petition, at the initial stage, is not encouraged. Earlier, there were several cases where the question of maintainability and dismissal of Company Petition on technical grounds went up to Supreme Court. Another complicated area under section 397/398 of the Companies Act, 1956 is about the powers of Company Law Board to decide the validity of certain actions and the remedial measures. There are several cases where the majority can make the Company a shell Company slowly and through various deeds and it is to deny the benefit to the minority shareholders. This is a very complex issue to deal with under section 397/398 of the Companies Act, 1956. If the Company Law Board is not effective in providing the remedial measures to the minority shareholders and it can only provide protective measures, the minority shareholders can only approach the Civil Court seeking remedial measures and the Civil Court lacks the expertise in dealing with these issues. Again, if the shareholders seek preventive measures and the limited remedial measures under section 397/398 of the Companies Act, 1956; and also approach the Civil Court seeking remedial measures against the Company like cancellation of agreements or contracts etc., then, the issue of ‘simultaneous proceedings’ would normally be pleaded by the majority. Like-wise, several issues are there as to why corporates or the shareholders usually term the proceedings under section 397/398 of the Companies Act, 1956 ineffective. As there is so much emphasis on ‘Corporate Governance’ which intended to safeguard the interests of the shareholders and public, there should be due emphasis in providing an effective remedy to the shareholders under section 397/398 of the Companies Act, 1956 as otherwise; the proceedings before the ‘National Company Law Tribunal’ under the proposed ‘new Companies Act’, will also be ‘ineffective’.

As there is no effective alternative, as the winding-up proceedings are discouraged normally if the Company is a going concern and in view of the stakes involved, there is no option for the minority shareholders in most of the cases except to approach the Company Law Board when there is ‘oppression’ and ‘mismanagement’ in the Company.

The interesting issue under section 397/398 of the Companies Act, 1956 is about dealing with subsidiary companies. It is true that the ‘holding company’ and ‘subsidiary company’ are two distinct legal personalities. It is also true that the ‘subsidiary company’ may not have frequent business transactions with the holding company or vise versa and the holding company may only comply with the regulations by providing with the particulars of the subsidiary companies in its financial statements or may comply with the regulations of Stock Exchanges or the SEBI regulations if the Company is a Listed Company. It is also true that that the subsidiary companies have close and frequent business transactions with the holding company or vise versa apart from the apparent investment and the control over the management. When the companies are closely held and when the holding company constitutes subsidiary companies with a specific objective, then, there tend to the frequent business or commercial dealings between or among the companies leaving allegations of diversion in many cases. It is a reality and it happens. If there are diversion of funds or unfair advantage by the holding company to the subsidiary companies and if the minority in the holding company wants to challenge such a mis-management, then, the minority shareholders may not directly question the mis-deeds in the subsidiary companies though an investigation can be sought under section 235 of the Companies Act, 1956. In strict senso, the shareholders of the holding company can not ask for all measures under section 397/398 of the Companies Act, 1956 against the subsidiary companies. This is a very complex issue and it is unfair and illogical to lay a principle that the shareholders of the holding company should wait for years before a main company petition asking for investigation decided and then, expecting the Central Government to step-in to investigate into the affairs and suggest the measures to be taken. It should depend upon the facts and circumstances of the case and logic should also be seen in these cases rather applying the sections of the Companies Act, 1956 technically. Despite the restricted wording under section 402 of the Companies Act, 1956 in deciding the validity of the transactions entered into between the Company and the outsiders, the Company Law Board is looking into those issues by adhering to the ‘principles of natural justice’ and by listening to all the parties concerned. If the logic applied that the shareholders of the Company can also ask the relief against a particular company under section 397/398 of the Companies Act, 1956, then, literally, there will not be any relief to the minority shareholders in the Company and they will be forced to approach Civil Court seeking appropriate remedy and a Civil Proceeding will take several years.

In view of the functioning of Civil Courts in this country, in view of stakes involved, in view of difficulties with simultaneous proceedings and in view of the tendency of discouraging the Civil Courts to deal with the Company disputes as is being specially mentioned in the new Companies Bill, the scope of section 397/398 of the Companies Act, 1956 and the powers of the Company Law Board can not be restrictive. It is true that the Company Petitions with vague allegations under section 397/398 of the Companies Act, 1956 can not be encouraged and at the same time, when there is a strong case of ‘oppression’ and ‘mis-management’, the Company Law Board or the National Company Law Tribunal in future should be in a position to provide remedy to the aggrieved shareholders.

Interpreting the provisions so strictly about proceeding against the subsidiaries, the Madras High Court, in Amalgamations Limited (Now Amalgamations (P) Ltd) & Others Vs. Shankar Sundaram & Others CDJ 2011 MHC 4938, was pleased to observe as follows:

“39. In fact, the Company Law Board relied upon the decision reported in Hungfordcase and rightly arrived at a conclusion that it will be improper and illegal to join subsidiaries in the company application on facts and circumstance of the case. But the Company Law Board has held that the main company petition under section 397 of the Act is not demurable or objectionable in the absence of subsidiary companies and their directors and share holders and in approprate case, they would come under the expression affairs of the company meaning the affairs of the holding company" Further, it was also held that "Therefore, when a person is not a member of a company, his alleging oppression and invoking the provisions of section 397 against that company does not arise. Therefore, a shareholder of a holding company cannot complaint of oppression by a subsidiary in which he is not a member as there is no legal relation between him and the subsidiary company."

40. Therefore, the proposition of law that the affairs of the company would mean the affairs of the subsidiaries also cannot be accepted as it creates a legal fiction to treat the members of the holding company as members of the subsidiary company. This section can be implemented only in so far as Section 235 of the Act invoking Section 214 (2) of the Act and not for section 397 and 398 of the Act. When the intention of the legislature is clear to include only one company simplicitor, we cannot put our own words into that. In fact, for this proposition also, the learned Senior Counsel relied on the decision reported in (Vijay Narayan Thatte and others vs. State of Maharashtra and others (2009) 9 SCC 92 wherein the Honourable Supreme Court held that when a plain gramatical meaning of law and literal rule of interpretation is very clear and when there is a conflict between law and equity, law as such must prevail.

41. The company Law Board has rightly held that "Thus, notwithstanding our findings that the affairs of a company do not include the affairs of its subsidiaries, we find that the petitioner has not has not even prima facie established that the inclusion of the subsidiaries either as necessary or proper parties to adjudicate his allegations against the holding company. Therefore, we are of the view that the prayer of the respondent subsidiaries and their directors to delete their names from the array of parties should be granted."

48. The Company Law Board has rightly concluded that the company petition is essentially a petition against the holding company. Therefore the Company Law Board found that without even going into the merits of the case and ordering investigation into the affairs of the holding company, the Court cannot definitely order for investigation into the affairs of the subsidiary companies. In fact, if it is found, after hearing the petition that the order of investigation can be made into the affairs of the holding company, then the provisions of Section 239 would come into play and it is for the inspectors, to be appointed by the Central Government, to decide as to whether the business of the subsidiary also required to be investigated. In fact, this has been held by the Division Bench of this Court in the decision reported in (MicromeriticsEngineers Pvt Ltd., and others vs. S. Munusamy) 2004 122 Company Cases 150 also, which is mentioned supra. Therefore, we hold that the Company Law Board has rightly stated that there need not be any direction and gave liberty to the respondent in case the respondent desires that there should be a direction for investigation into the affairs of any of the subsidiary company, it is always open to him to file separate applications in terms of Section 214 (2) read with Section 235 of the Act. When this safeguard was given by the company Law Board, it is not open for the respondent, at this stage, to contend that because the company application filed by him is a combined application, it has to be taken up together along with the main company petition when he has not complied with Section 399 (4) of the Act.

49. In any view of the matter, as we have found that the respondent has not even made any allegations against the subsidiary company or claimed any relief against most of the subsidiary companies in the main company petition and as per the decisions of the Honourable Supreme Court mentioned supra, the subsidiary companies cannot be included in the Company Petition. Hence, the order passed by the learned single Judge, setting aside the order of the Company Law Board deleting the subsidiary companies from the array of parties, is not correct. Inasmuch as the subsidiary company cannot be made as a party to the company petition, we are inclined to allow LPA Nos. 129 and 131 of 2002.”

In the above case, the issue was deletion of names of the subsidiaries in a petition under section 397/398 of the Companies Act, 1956. If, on fact, there is no prima facie allegation of diversion etc. against the subsidiaries, then, there can be justification in ordering the deletion of the names of the subsidiaries in a petition under section 397/398 of the Companies Act, 1956. The Company Law Board has dealt with the issue both on facts and on law. While dealing with the issue legally, the Company Law Board has highlighted the difference between section 397/398 and the provisions of investigation under section 235 of the Act. In fact, cumulative proceedings before the Board are encouraged and it is very usual to seek relief under section 397/398 and also under section 235 of the Act etc. However, in the above case, a restrictive scope is given to section 397/398 of the Companies Act, 1956 and it may not be correct. If such an interpretation is drawn where there is prima facie illegality in transactions between holding company and the subsidiary company, then, there will not be any effective remedy to the minority shareholders under section 397/398 of the Companies Act, 1956 and the in fact, the section becomes meaningless.

It all depends upon the facts and circumstances of the case; however, giving a restrictive meaning to section 397/398 of the Companies Act, 1956 is not in the interests of the minority shareholders. It is also equally true that the frivolous litigation misusing section 397/398 of the Companies Act, 1956 is to be discouraged at the initial stage itself considering the market dynamics and the impact.

Note: the views expressed are my personal.

397/398: When to grant Interim Injunction in conducting ‘General Body Meetings’ and implementing Resolutions?

Section 397/398 of the Companies Act, 1956 guarantees a right to the minority to approach the Company Law Board or the Tribunal seeking preventive and some remedial measures against the majority in the Company when there is an ‘Oppression and Mis-management’ in the Company. Only shareholders who are qualified under section 399 can approach the Company Law Board (CLB) under section 397/398 of the Companies Act, 1956. Though Constitutional Courts have tried to define as to what constitutes ‘oppression’ and ‘mis-management’, infact, it is subjective always. But, the Courts have laid-down broad guidelines which are to be followed. Certain issues are settled under section 397/398 of the Companies Act, 1956 despite the trend of granting relief or interim relief to the Petitioners even when there was no ‘Oppression and Mis-management’ in stricto senso. In view of the stakes involved in most of the times, it is highly complicated exercise to deal with a petition under section 397/398 of the Companies Act, 1956. It is often criticized that the Company Law Board (CLB) is not effective in addressing the concerns of the minority shareholders. It is also been criticized that the jurisdiction of the Company Law Board is misused in most of the times and a negligent minority tries to stall the functioning of the Company at times. As such, every effort is normally made in making a good balance between the rights of the minority against the oppression and the rights of the majority shareholders in taking decisions without any hindrance and in the interests of the Company.

There were judgments on section 397/398 of the Companies Act, 1956 relying on technicalities even at the final stage. Now, in my opinion, technicalities are ignored and the substance is keenly noted in a petition under section 397/398 of the Companies Act, 1956. For example, there were many decisions on the issue of ‘consent’ under section 399 of the Act and there were judgments saying that disputed facts can not be decided by the Company Law Board and those require Trial. In the recent past, there were no such pronouncements.

But, it is very often seen where the shareholders approach the Company Law Board asking for injunction in conducting AGM’s, against the proposed removal from Directorship and against a particular resolution sought to be passed. It is true that unless the trust between the groups is lost, shareholders will not go for litigation and will not approach the Company Law Board. But, is it justified granting injunctions preventing conduct of meetings and granting injunction against a particular resolution?. It is again subjective and there can not be any straight-jacket formula in this regard as courts have laudably noted. The most important thing is that the materials placed before the Board and the averments should establish a prima facie case of ‘oppression’. But, unless there is a prima facie case of oppression or an action which is prejudicial to public interest, no interim order or injunction can be granted. Noting on the same lines, the Hon’ble High Court of Madras in N.Ram & others Vs. N.Ravi & others, reported in CDJ 2011 MHC 1037, was pleased to observe as follows:

“44. On consideration, I find force in the contention raised by the learned Senior Counsel appearing on behalf of the appellants. The Hon'ble Company Law Board cannot issue injunction in implementing the decision to be taken by the shareholders in its meeting, unless the prima facie finding is recorded, that the decision is prejudicial to the public interest or the company at large.

45. This view was taken by the Hon'ble Company Law Board on an earlier occasion while rejecting the relief claimed against the decision to do away with family succession and it was left to the Board of Directors and shareholders, to consider this issue. It was always open to the shareholders to take a decision, in view of the earlier order.

46. The Hon'ble Company Law Board also failed to take note of the fact that the respondents were yet to file their counter, it was stated that the decisions to be taken in the EGM were likely to take sometime, therefore, there was no urgency to pass impugned order on 18th May itself, specially when the order could be made subject to the final decision to be taken by the Hon'ble Company Law Board.

47. The Hon'ble Supreme Court in the case of Life Insurance Corporation of India vs. Escorts Ltd and others(supra) had categorically laid down that it is not open to the Company Law Board to issue injunction with regard to functioning of the company.

48. As already observed above, in the order passed, no finding has been recorded regarding the resolution of the Board of Directors, that the matter placed before the EGM was prima facie prejudicial to the public interest or functioning of the company.

49. It is also well settled that the shareholders can only watch the proprietary interest in the company and cannot object to the day to day decision and functioning of the Company.

50. In this case, by placing the matter before the shareholders, the Board of Directors were seeking consent of the shareholders. If any civil rights of the parties were likely to be affected, then that can be subject matter of civil suit, but certainly will not be falling under Sections 397 and 398 of the Companies Act.

51. The resolution also prima facie cannot be said to be against the earlier order of the Hon'ble Company Law Board, as the relief with regard to succession, was specifically declined, leaving it open to the Board of Directors and its shareholders to take a final decision.”

Note: the views expressed are my personal and a point of view only.

Section 397/398: Harassment to majority shareholders?

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.