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.

CLB: Procedure before CLB in a proceeding under Section 397/398 and applicability of the provisions of C.P.C?

There was a specific objective behind section 397/398 of the Companies Act, 1956 and a great responsibility is cast upon the Company Law Board to protect the interests of the minority shareholders, to put an end to the matters complained of and to regulate the affairs of the Company. The absence of an effective remedy to address the serious grievances of the shareholders in the Company will directly impact the growth of corporate world. We know growth and contribution of Private Limited Companies and Small Enterprises in our economy rather the big listed Public Companies. To the extent possible, differences between the shareholding groups in any Company is to be addressed and every effort is to be taken to ensure that the Company functions smoothly rather resorting to winding-up. The same is the object behind constitution of BIFR and section 391 to 394 of Companies Act, 1956. It is more important to protect the interests of the shareholders in a Company and it is very important to deal with the issues of oppression and mis-management. Some feel that the remedy provided under section 397/398 of the Companies Act, 1956 is not effective and some plead that the unscrupulous are abusing section 397/398 of the Companies Act, 1956 and tries to create numerous problems to the controlling majority in the Company. While it is true that in few cases, a negligible minority tries to abuse the remedy under section 397/398 of the Companies Act, 1956; in many cases the minority feels that their rights are not property and effective protected under section 397/398 of the Companies Act, 1956. A proceeding under section 397/398 of the Companies Act, 1956 is really complicated and as usual there exist difficulties when it comes to execution of an order. It was really shocking to me to see the parties before the Company Law Board pleading pure technicalities without any logic and fair play and we can find judgments stressing on provisions of C.P.C etc. But, as I opine always, there was a change in the manner in which the proceedings before the Company Law Board under section 397/398 of Companies Act, 1956 are entertained. Technicalities are ignored now and there is enough proof for this. Now, petitions questioning maintainability of petitions under Section 397/398 of the Companies Act, 1956 are not taken seriously at the inception. There were judgments saying that even in the absence of clear oppression and mis-management, nothing prevents the CLB in passing orders in the interests of the shareholders. Barring the part of execution and the issues of contempt, now, I am sure that the aggrieved can definitely get a relief in a proceeding under section 397/398 of the Companies Act, 1956 and it is difficult to misuse the process.

The important aspect of a proceeding before the Company Law Board is about the procedure and the applicability of the provisions of Civil Procedure Code. The intention behind constitution of Special Tribunals is to simplify the procedure and to avoid the enormous delay in Courts due to strict applications of provisions of Civil Procedure Code. Despite all this, technicalities were pleaded in a proceeding under Section 397/398 of the Companies Act, 1956 very often. I firmly believe that the CLB can follow any reasonable procedure in a proceeding under section 397/398 of the Companies Act, 1956 in adherence to the principles of natural justice, fair play and in adherence to the object of the provision. In a recent judgment under section 10 (F), the Hon’ble Madras High Court has dealt with the issue some what clearly and it has straight-away addressed the issue of applicability of the provisions of Civil Procedure Code in a proceeding under section 397/397 of the Companies Act, 1956. While dealing with the issue, the Court has considered the difference between the Company Court rules and the regulations of Company Law Board, the amended provisions of Companies Act, the dictum in Needle Industries case, and consequent amendments to the few connected provisions. The Hon’ble Madras High Court, in Company Appeal No.6 of 2009, between K. Muthusamy & Another Vs. S. Balasubramanian & Others, CDJ 2011 MHC 959, was pleased to observe as follows:

“39. The second contention of the appellants is that the law of pleadings and the provisions of the Indian Evidence Act, apply to the proceedings before the Company Law Board. Therefore, the Company Law Board ought not to have taken note of the new pleadings made by the impleaded parties and ought not to have accepted the pleadings made without any evidence.

40. Section 10E (4C) of the Companies Act, 1956, vests with the Company Law Board, the same powers, as are vested in a Civil Court under the Code of Civil Procedure, 1908, for (i) discovery and inspection of documents (ii) enforcing the attendance of witnesses (iii) compelling the production of documents (iv) examining witnesses on oath (v) granting adjournments and (vi) reception of evidence on affidavits. Sub section (4D) of Section 10E declares that the Company Law Board shall be deemed to be a Civil Court for the purposes of Section 195 of the Code of Criminal Procedure. However, sub section (5) of Section 10E states that the Board, in the exercise of its powers and discharge of its functions, shall be guided by the principles of natural justice and shall act in its discretion. Sub section (6) of Section 10E also empowers the Board to regulate its own procedure.

41. Therefore, it is clear that strict rules of pleading and proof, as required in Civil Courts, are not applicable to the proceedings before the Company Law Board. As a matter of fact, the rules of procedure to be followed by this Court as a Company Court are regulated by The Companies (Courts) Rules 1959. Rule 2(4) defines the word "Code" to mean the Code of Civil Procedure, 1908 and Rule 6 of The Companies (Courts) Rules, 1959, makes it clear that the practice and procedure of the Court and the provisions of the Code, so far as applicable, shall apply to all proceedings under the Act and these rules. Rule 6 also states that the Registrar (Registrar of the Company Court) may decline to accept any document which is presented otherwise than in accordance with these rules or the practice and procedure of the Court.

42. In contrast, the Company Law Board Regulations 1991, issued in exercise of the powers conferred by Section 10E(6) of the Act, do not either define the word "Code" or contain a provision similar to Rule 6 of the Companies (Courts) Rules 1959. Regulations 11 to 13 indicate the form and contents of a petition to be filed before the Board. Regulation 14 prescribes the procedure for filing the petition. Regulation 18 makes it necessary to enclose documents as prescribed in Annexure III, to the petition. Regulation 22 requires every respondent before the Board to file a reply to the petition along with the documents relied upon by the respondents. Regulation 38 imposes a bar upon the withdrawal of a petition under Section 397 or 398, without the leave of the Board. Regulation 47 declares that the Bench of the Board will be deemed to be a Court for the purpose of prosecution or punishment of a person who willfully disobeys any order of the Bench. More importantly, Regulation 48 empowers the Board, for reasons to be recorded in writing, to dispense with the requirements of any of these regulations subject to such terms and conditions as may be specified.

43. Thus, the law makers have maintained a clear distinction between the rules of procedure to be adopted by the Company Court under the Companies (Courts) Rules, 1959 and the rules of procedure to be adopted by the Company Law Board under the Regulations of 1991. Not only does Section 10E(5) & (6) confer a discretion upon the Board to regulate its own procedure and be guided by the principles of natural justice, but Regulation 48 goes a step further by empowering the Bench to dispense with the requirements of any of the regulations.

44. In Needle Industries (India) Ltd., the Supreme Court observed as follows:-

"It is generally unsatisfactory to record a finding involving grave consequences to a person on the basis of affidavits and documents without asking that person to submit himself to cross-examination. It is true that men may lie but documents will not and often, documents speak louder than words. But a total reliance on the written word, when probity and fairness of conduct are in issue, involves the risk that the person accused of wrongful conduct is denied an opportunity to controvert the inference said to arise from the documents".

But, it must be remembered that at the time when Needle Industries was decided, sub sections (5) and (6) of Section 10E were differently worded. They were replaced by new sub sections (5) and (6) only with effect from 31.5.1991. Before 31.5.1991, the conduct of the proceedings before the Board was governed by The Company Law Board (Bench) Rules 1975. They were replaced by the Company Law Board Regulations 1991. Therefore, the procedure to be followed by the Board has to be understood in the context of the amended sub sections (5) and (6) of Section 10E and the provisions of the Company Law Board Regulations 1991.

57. Interestingly, the appellants who make a big hue and cry about strict rules of pleadings and evidence have not taken note of the relevant provisions of the regulations. Regulation 22 (2) of the Company Law Board Regulations 1991, enables a respondent before the Company Law Board to file a reply containing such additional facts as may be found necessary for the just decision of the case. Regulation 23 empowers the Company Law Board to give an opportunity to the petitioner before the Board to file a counter-reply to the reply of the respondent, whenever additional facts are pleaded in the reply. Therefore, there is no bar for a respondent before the Company Law Board to plead additional facts. But there is no provision for a contesting respondent to file a counter-reply to the reply of a co-respondent, since the opportunity available under Regulation 23 is actually to the petitioner. However, without sticking on to the dry letter of the law, as always done by persons who have no case on merits, the Company Law Board permitted the appellants herein (who were respondents 2 and 3 before them) to file a reply to the Statements filed by the Receiver (5th respondent). By doing so, the Board actually complied with the letter and spirit of Section 10E (5).”

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

CLB: CLB’s power to set-aside Agreements/Contracts under section 397/398?

There can be disputes between majority group and minority shareholders in any Company and these disputes come very frequently in closely held companies or Private Limited Companies. The Companies Act, 1956 provides certain rights to the shareholders and any Private Limited Company is supposed act as per its Articles and the provisions of the Act. We are also aware of the principle that if the Articles are contrary to the clear provision under the Act, then, the same is invalid and can not be enforced upon. Closely held Private Limited Companies are very often run as proprietorship concerns or the partnership firms. Despite clear provisions and despite having many assets and good turn-over, a Private Limited Company may not bother to maintain the books, registers and may not bother to file the required forms with the Registrar of Companies. Despite the concept of separate corporate existence and despite the regulations as to how a Company is to be run, we can see agreements between or among groups in a Private Limited Company on the issue of capital and profit sharing. I have seen many cases and many could have seen as to the seriousness of disputes among shareholders and in some cases, the stakes are very high. I have seen some cases, where the shareholders are entitled for a substantial shareholding in many group companies having good value, but, still they are afraid as to whether they get their legitimate share in the Company or not. When a dispute comes between or among the shareholders in a Company, then, it is very easy to hide behind technicalities to deny the legitimate right of other shareholders in the Company and it is also true that at times the majority is being harassed by the minority group relying on technicalities and provisions of the Act. A minority group may take-over the Company through fabricating certain documents and all directors representing majority shareholders may also get removed surprising by uploading few forms with the Registrar of Companies as if those Directors are retired voluntarily. These disputes among shareholders normally come to Civil Court or High Court, and more frequently to the Company Law Board under section 397/398 of Companies Act, 1956. No shareholding group in a Company come to Court for simple things and mis-understandings as it will further frustrate the relationship between the majority and minority group in the Company. It is only when a group of shareholders feel oppressed or aggrieved at the mis-management in the Company, they prefer to approach Court of Law and they normally approach Company Law Board under section 397/398 of Companies Act, 1956 if they are qualified under section 399.

Any litigation before Company Law Board under section 397/398 of the Companies Act, 1956 would normally be complicated. Giving a clear finding is always difficult for the Board under section 397/398 of the Companies Act, 1956 and every effort is normally taken in encouraging the parties to arrive at a settlement or ensuring that a group quits from the Company by selling their shares to other at the price determined by the mutually acceptable mechanism. But, when the two groups are reluctant to find a way out to the dispute between or among them, then, the Company Law Board may give a finding on many issues raised in the Petition with the intention of putting an end to the matters complained of or with the intention of regulating the affairs of the Company. But, if it is constantly litigated by the groups by taking the order of the CLB to the High Court and to the Supreme Court, it will definitely take time and the order may get modified again and again and even the matter in Appeal may get reverted back to the Board for consideration afresh in view of further developments in the Company. These are all the complications under section 397/398 of Companies Act, 1956.

There is a feeling that the remedy before the Company Law Board is not really effective. I do feel that initially technicalities have considerably driven litigation before the Company Law Board and now the approach is slowly changing. We have got many judgments stressing on the word ‘oppression’ and ‘mismanagement’ and as to what are all the requirements to maintain a petition under section 397/398 of the Companies Act, 1956. I have also seen cases where the Courts held that the disputed facts can not be decided by the Company Law Board. But, the approach to the litigation under section 397/398 of the Companies Act, 1956 has slowly changed and now we can find a precedent where it is said that the CLB can pass orders even when ‘oppression’ or ‘mis-management’ is not proved in stricto-senso. We have seen as to how appeals under section 10 (f) are entertained now though the appeal is maintainable only on ‘question of law’. We have seen a good improvement under section 10 (f) that when the order of CLB is perverse, then, the perversity itself becomes a question of law under section 10 (f).

The very important issue according to me under section 397/398 of the Companies Act, 1956 is about the power of the Company Law Board to set-aside agreements or contracts entered into between the Company and the outsiders and as to how to interpret section 402 in this regard. In my opinion, there can not be any restrictions on the Company Law Board in giving a finding with regard to any kind of oppressive or acts of mismanagement on the part of the majority in the Company. Unless a transaction is unrelated to the issue of oppression and mismanagement, the CLB should have authority to look into all issues and should be able to give an enforceable finding. If the CLB says that it can not decide the validity of agreements or contracts in all cases and if it says that any decision on the validity of an agreement or contract requires a trial, then, it will straight away defeat the very object of constitution of Company Law Board and the object of section 397/398 of the Companies Act, 1956. Everybody knows as to what happens if one approach the Civil Court and it’s a fact that finality to a civil dispute may not come even in 10 to 15 years for the obvious reasons. Under these circumstances, if the parties are advised to approach Civil Court under section 397/398 of the Act based on technicalities, then, I am sure that the high stakes of shareholders in the Company are very likely to be affected. For example, if a majority group in the Company manages to sell the valuable assets of the Company to an outsider mentioning very meager price in the Agreement or the Contract, then, the other minority shareholders are straight away gets affected. In these cases, CLB should be in a position to provide effective relief to the minority as otherwise, minority group may seriously get prejudiced. The functioning of Civil Courts and the object of constituting special tribunals requires a concentration in this regard and the Hon’ble Supreme Court, in CIVIL APPEAL NO.3717 OF 2005 between Madras Bar Association Vs. Union of India, was pleased to observe as follows:

“18. The argument generally advanced to support tribunalisation is as follows: The courts function under archaic and elaborate procedural laws and highly technical Evidence Law. To ensure fair play and avoidance of judicial error, the procedural laws provide for appeals, revisions and reviews, and allow parties to file innumerable applications and raise vexatious objections as a result of which the main matters get pushed to the background. All litigation in courts get inevitably delayed which leads to frustration and dissatisfaction among litigants. In view of the huge pendency, courts are not able to bestow attention and give priority to cases arising under special legislations. Therefore, there is a need to transfer some selected areas of litigation dealt with by traditional courts to special Tribunals. As Tribunals are free from the shackles of procedural laws and Evidence Law, they can provide easy access to speedy justice in a `cost-affordable' and `user-friendly' manner. Tribunals should have a Judicial Member and a Technical Member. The Judicial Member will act as a bulwark against apprehensions of bias and will ensure compliance with basic principles of natural justice such as fair hearing and reasoned orders. The Judicial Member would also ensure impartiality, fairness and reasonableness in consideration. The presence of Technical Member ensures the availability of expertise and experience related to the field of adjudication for which the special Tribunal is created, thereby improving the quality of adjudication and decision-making.”.

While it is true that unconnected issues can not be agitated before the Company Law Board under section 397/398 of the Companies Act, 1956, all issues which are part of oppression and mismanagement, are to be decided by the CLB without laying any emphasis on technicalities.

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

CLB: CLB’s responsibility to supervise the Company affairs even after passing final orders in a petition under section 397/398?

In any litigation, the Court or the authority adjudicating the matter can pass interim orders and the matter will get finally disposed of. Once the matter is dispose of finally, there ends the litigation and the final order can be executed. If there is a provision for review having limited scope, the court can review its order. This is the procedure in any case; be it a suit for recovery of money, be it a petition seeking divorce, be it a petition for compensation under Motor Vehicle Law and be it a Writ Petition. But, the Company Law Board entertaining a petition alleging oppression and mismanagement under section 397/398 of the Companies Act, 1956 can entertain applications under section 402 even after passing the final order. Because, the responsibility of the Company Law Board does not end with giving a finding on the allegations after looking into evidence and after hearing the submissions from both sides. The responsibility of the Company Law Board under section 397/398 of the Companies Act, 1956 is to put an end to the matters complained of and to regulate the future affairs of the Company. The Company Court has a responsibility while entertaining a petition seeking winding-up and the Court considers various issues and may want to listen to various other interested parties too while passing an order. The Company Court may try to rescue the Company rather winding-up the Company by technically applying the principles governing the winding-up of the Company. On the same principle, a great responsibility is cast upon the Company Law Board under section 397/398 of the Companies Act, 1956 and every endeavor is normally made to put end to the matters complained of and to regulate the affairs rather suggesting to wind-up the Company. That is why, the proceedings before the Board under section 397/398 of the Companies Act and the procedure followed is interesting and complicated. Many aspects under section 397/398 of the Companies Act, 1956 are interesting and also complicated.

If the Company Law Board is able to convince the warring parties or groups towards amicable settlement in a Petition under section 397/398 of the Companies Act, 1956 or if any group quits from the Company by selling their shares, there can not be any further problem in the Company and the Company will remain a going concern without any internal disturbance. But, when the warring shareholding groups decides to stay in the Company and when the Petitioners want remedial and regulatory orders and when the Company Law Board decides to pass orders to regulate the affairs of the Company, then, it is likely that the litigation continues even after final disposal of the Company Petition under section 397/398 of the Companies Act, 1956. There may be problems as to how the final order is to be understood and there may be problems in implementing the orders of the Board and as such, there can be a need for the aggrieved shareholding group or the majority group to approach the Company Law Board under section 402 of the Companies Act, 1956 even when the main petition under section 397/398 is finally disposed of.

There are two aspects in this regard in my opinion. The Board itself can clearly aver its further jurisdiction in the course of implementation of its final order and the Board may itself can keep the matter pending though final orders were passed. There is also a chance where the Board intends to pass detailed final order in a petition under section 397/398 of the Companies Act, 1956 without expressing anything on its further jurisdiction in the matter. In my opinion, in both the cases, the Company Law Board can entertain applications under section 402 of the Companies Act, 1956 in view of the object of section 397/398 of the Companies Act, 1956 and the complications involved in many corporate disputes among shareholding groups.

Dealing with entertaining applications under section 402 of the Companies Act, 1956 even when the main petition under section 397/398 of the Companies Act, 1956 is disposed of, the Hon’ble Bombay High Court, in Mohinidevi Choraria & another Vs. Apsara Cinema Pvt. Ltd & others, 1988 (4) BCR 597, 1988 MAH.L.J 1004, was pleased to observe as follows:

“The future conduct of Company's affairs can be regulated by the order made under Section 397 or 398 of the Act and not by an independent proceeding. This does not, however, mean that such an order under section 402 cannot be made subsequent to the termination of the petition under Section 397 or 398 of the Act. An order regulating the conduct of the Company's affairs in future may be made under section 402 after the disposal of the petition under Section 397 or 398 of the Act, provided, the circumstances of the case show that by its order under sections 397 or 398, the Court had retained seisin over the matter. Whether the Court has retained seisin depends upon the facts and circumstances of each case. The cases of Richardson and Cruddas Ltd., Life Insurance Corporation of India v. Haridas Mundhra and others, A.I.R. 1959 Cal. 695, (Lord Krishna Sugar Mills Ltd., v. Smt. Abnash Kaur), (1974)44 Company Cases 210 and (Bhagwati Prasad Bajoria and others v. British India Corporation Ltd., Kanpur and others), A.I.R. 1964 All. 75, illustrate cases where seisin may be inferred. In other words, the order under Section 397 and or 398 by its very nature must leave the doors open for future application under section 402 of the Act.”

The jurisdiction of Company Law Board to entertain applications under section 402 of the Companies Act, 1956 even when the main petition under section 397/398 of the Companies Act, 1956 disposed of depends on the facts and circumstances of the case and especially the final order passed by the Board.

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

Oppression and Mismanagement: Construing ‘consent’ under section 399 of Companies Act, 1956?

Section 399 of Companies Act, 1956 deals with the issue of qualification to file an application under section 397/398 of Companies Act, 1956 seeking appropriate relief when there exists oppression and mismanagement in the Company. The qualification prescribed under section 399 is based on shareholding and also membership. Clause (1) of Section 399 of the Act is as follows:

“399. (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.”

Thus, an application under section 397/398 of the Companies Act, 1956 can be representative application too. It need not always be representative as any one or two shareholders can possess more than 10% shareholding in the Company. When it is representative, the members should give their ‘consent’ for approaching the Company Law Board under section 397/398 of the Companies Act, 1956. Many applications are usually filed in respect of closely held companies or family companies and a group is normally led by a prominent member in the group who will take all decisions on-behalf of the group. Under these circumstances, there may not be any problems with ‘consent’. However, where many members join together and consent for filing an application under section 397/398 of the Companies Act, 1956, then, there will be complications. Because, an application under section 397/398 of the Companies Act, 1956 can lead to disastrous consequences in the Company at times. Thus, the members consenting to file an application under section 397/398 of the Companies Act, 1956 should apply their mind to the contents and allegations in the application under section 397/398 of the Companies Act, 1956. Dealing with the issue, the Hon’ble Delhi High Court in Omni India Limited and Others Vs. Balbir Singh, 1989 66 Comp Cas 903 Delhi, was pleased to observe as follows:

“10. The word "consent", according to Webster's Third New International Dictionary, inter alia, means compliance or approval of what is done or proposed by another, acquiescence, permission, capable, deliberate and voluntary agreement to or concurrence in some act or purpose implying physical and mental power and free action. According to Mozley and Whiteley's Law Dictionary, Tenth Edition, "consent" presupposes physical power, mental power and a free and serious use of them. Examined in the light of these meanings and keeping in view the purpose for enacting section 399, we have no doubt, that the expression "consent in writing" used in section 399(3) means conscious approval of the action proposed to be taken by the persons to whom the consent has been given. We are also of the view that the writing itself should indicate that the persons who have signed the consent letters have applied their minds to the question before them and on application of minds have given consent for a certain action. Under section 402 of the Act, the court, on an application under sections 397-398 and without prejudice to the generalities of the powers of the court, can grant several types of reliefs. In this background, it is necessary that the writing must indicate that the members giving consent had applied their minds to the allegations to the made and the reliefs sought to be prayed for in the proposed action and have given their consent for seeking those reliefs. This is apparent from the expression "consent in writing". Had the intention been that the writing should not indicate the application of mind, then there was no necessity for using the term "consent in writing" and mere word "consent" could have been used. To hold that the requisite members can give their consent in writing without applying their minds or without considering the nature of the allegations and the reliefs sought would frustrate the entire purpose of section 399 which prohibits the filing of an application under section 397 or 398 of the Act, inter alia, by not less than 100 members.”

However, who can raise objections to the ‘consent’ and at what stage, is also important in an application under section 397/398 of the Companies Act, 1956. Because, on the ground that the question of law can be raised at any stage, if an application under section 397/398 of the Companies Act, 1956 is dismissed at the final stage applying the legal principles on the issue grammatically, then, it may not be correct. The object of section 397/398 of the Companies Act, 1956 is to be considered in this regard. If the Respondents in the application raise the issue pertaining to the consent in their reply statement or even orally before the Board at the initial stage, then, the petitioning members can convince the Board that all the members have applied their minds to the application. Even in the absence of any allegation and the consequent reply from the applicants, in my view, the Board can insist the applicants to address the issue. It all depends upon the facts and circumstances of each and every case and there can not be any hard and fast rule in this regard. The Board can also allow the consented members to add themselves independently in the application and it is in consonance with the object of section 397/398 of the Companies Act, 1956 keeping the technicalities apart. A member who has consented for filing an application may wish to state his views independently and dealing with such a situation, the Hon’ble Calcutta High Court, in Pramod Kumar Mittal Vs. Andhra Steel Corporation Ltd, 1985 (58) CC 772, was pleased to observe as follows:

“(3) We are further of the opinion that a section 397 application is a representative application in the sense that it is on behalf of 10% of the shareholders which is required to maintain such an application and if those shareholders who had given their consent come to oppose or make any application before the court, they have sufficient locus standi to be heard by the court and as such, in an appropriate case like the present, one has a right to be added as parties in their own names. In this case, inasmuch as Promode Kumar Mittal and other appellants were supporting Mohanlal Mittal in the application under section 397 before the court and inasmuch as Mohanlal Mittal was no longer prosecuting the section 397 application or opposing a particular transaction during the pendency of section 397 application of the Companies Act, we are of the opinion that the present appellants were entitled to be added as parties and not acceding to that prayer, the learned judge was in error.”

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

How to look at the issue of ‘membership’ under section 399 of Companies Act, 1956?

Section 397/398 of the Companies Act, 1956 provides a relief to the minority against the majority if the majority indulges in the oppressive acts and the acts of mismanagement. It is not that every shareholder can avail the remedy available under section 397/398 of Companies Act, 1956 and section 399 specifically deals with the issue as qualification to file a petition under section 397/398 of the Act. Section 399 of the Companies Act, 1956 substantially provides as follows:

“399. (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.”

As such, the issue of membership in the Company is crucial under section 399. However, there may be companies which are in reality run like proprietorship concerns or the partnership firms without adhering to the corporate regulations and without bothering much about the provisions of the Companies Act, 1956 etc. These are all family companies or closely held companies normally. As such, if the issue of membership is seen technically, then, the actual members or persons entitling for membership in the Company may not be regarded as members under section 399 of the Companies Act, 1956. Often these problems arise in a petition under section 397/398 of Companies Act, 1956. The majority in some cases contend that the petition itself is not maintainable on the ground that the petitioners do not qualify to maintain the petition under section 397/398 based on the records maintained by the Company and as such they will raise the issue of maintainability as a preliminary issue. The issue as to how to entertain the objections with regard to maintainability of the petition under section 397/398 of Companies Act, 1956 will normally depend upon the facts and circumstances of the case and there can not be any hard and fast rule in this regard.

Dealing with the issue of membership under section 399 of the Act in the light of section 41 of Companies Act, 1956, the Hon’ble Karnataka High Court in Shri Balaji Textile Mills Pvt. Ltd. And another. Vs. Ashok Kavle and Ors, 1989 66 CompCas 654 Kar, ILR 1988 KAR 1213, was pleased to observe as follows:

“15. We will first consider the provisions of section 41 of the Act which read as follows:

"41. (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members.

(2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company."

16. The setting of this section should be noticed. This section comes under Part II and Part II deals with the incorporation of a company and matters incidental thereto though the marginal note to section 41 reads:

"Definition of `member'".

17. In our view, that by itself does not throw any light on the scope of section 41 of the Act. The word "member" is also defined under sub-section (27) of section 2 of the Act. Sub-section (27) of section 2 of the Act reads as follows:

"`member', in relation to a company, does not include a bearer of a share- warrant of the company issued in pursuance of section 114."

18. The difference in the language of section 2(27) of the Act which comes under the definition clause in the Act and section 41 dealing with the membership of the company should be noticed. In section 2(27), the word "member" is defined in a very comprehensive manner and in relation to a company includes every type of member but excludes a bearer of a share- warrant of a company issued under section 114 of the Act. But, in section 41 of the Act, under the heading "membership of company", what is provided is that, in the case of subscribers to the company, they should be deemed to have been members of the company and their names shall be entered in the register of members. Under section 41(2) of the Act, every other person who agrees in writing to become a member of the company and whose name is entered in the register of members shall be a member of the company. So, the first part of section 41 deals with deemed membership and the second part of it deals with persons other than subscribers to the memorandum of the company.

19. Now, the point for consideration is whether this definition of "member" in section 41(2) of the Act would, in any manner, control the meaning of the word "member" in the other provisions of the Act which confer on these member certain substantive rights as shareholders of the company, e.g., sections 397 and 398 of the Act under which this petition is filed. Chapter VI of the Act provides for prevention of oppression and mismanagement of the minority shareholders of a company. Under section 397 of the Act, the minority shareholders can approach this court for relief against acts of oppression. Under section 398 of the Act, they can approach this court for reliefs against acts of mismanagement. The right to apply under sections 397 and 398 is controlled by section 399 of the Act. So, for the purpose of considering whether an application under sections 397 and 398 of the Act is maintainable, the line of enquiry should be as to whether the persons who claim relief under sections 397 and 398 of the Act come within the scope of the provision of section 399 of the Act. Section 399 of the Act reads as under:

"(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."

20. A combined reading of sections 397, 398 and 399 of the Act makes it clear that the meaning of the word "member" of a company should be understood in the context in which it is used and that meaning cannot be tagged on to the membership clause in section 41(2) of the Act. The clause which is applicable to test whether a member satisfies the requirement of section 397 and 398 of the Act would be section 2(27) of the Act and not the provision of section 41(2) of the Act. The language of section 41(2) of the Act as it existed prior to the amendment would throw some light on the scope of this provision. Before section 41(2) was amended, the language of that sub-section was "every other person who agrees to become a member of the company." But, after the amendment, the words "in writing" were incorporated. Why these words were introduced in the Amendment Act of 1960 is found in the report of the Companies Act Amendment Committee which reads thus:

"It has been brought to our notice that in some cases, on the verge of liquidation, entries are made in the register of members of the names of persons who never applied for shares, in order to fasten liability on these persons as contributories. To avoid this contingency, we suggest the addition of the words `in writing' after the word `agrees' in section 41(2)." (para 38 of the report).

21. So, this amendment was designed to protect the interests of persons who would have been otherwise fastened with liabilities as contributories, even in the absence of any request for allotment of shares of them. Perhaps there had been innumerable cases where such liabilities have been passed on even in the absence of a request for allotment. To avoid such a contingency, the committee made a recommendation that in case of any dispute about allotment, that dispute could be satisfactorily resolved by insisting on an application in writing for allotment of shares. So, this amendment has a limited scope and has to be interpreted by applying the rule of mischief as understood in the law relating to the interpretation of statutes.

42. These observations will go to show that if a shareholder who claims relief under sections 397 and 398 of the Act satisfies the company court that he is a shareholder of a company by virtue of allotment of shares in his favour which is evidenced not only by the register of members maintained by the company but also by the statutory returns and documents maintained and filed by the company, it is not open to the contesting respondents to content that for the purpose of sections 397 and 398 of the Act, a shareholder must comply with the condition precedent stipulated in section 41(2) of the Act.”

Again on the issue as to how Section 399 of Companies Act, 1956 is to be interpreted when the maintainability is questioned on the issue of membership, the Hon’ble Karnataka High Court, in Vijayan Rajes S/o M.S.P. Rajes & Another Vs. MSP Plantations Private Limited & Others, 2009 ILR(Kar) 3576, was pleased to observe as follows:

“32. The reasoning given by the Company Law Board does not appeal to us. If the finding is to be that the persons presenting the petition do not qualify for presenting a petition under Section 399 of the Act, no further question arises and the petition was to be dismissed at the threshold. But the Company Law Board has viewed the working of the Section 399 of the Act in the converse way, which is not a proper understanding of the provisions of Section 399. But, on authority, it has been established that for the purpose of examining as to whether the petitioning members qualify for maintaining a petition under Section 399 of the Act, the question to be looked into is as to whether the petitioners constitute the requisite number of members or they had the requisite shareholding in the company prior to the acts complained of. If the date of presentation of the petition should be looked into in a technical way, it could defeat the very purpose of the legislative enactment of Sections 397 and 398 of the Act, as the overbearing majority shareholders can simply by highhanded action or even for other purpose and by oppressive methods, dismember minority shareholders and leave them with no remedies, as the dismembered minority shareholders technically do not qualify for maintaining a petition under Section 399 of the Act, being not member at all. As the minority shareholders will be complaining only after the acts occurred and when they have been removed from the membership of the company, the understanding and interpretation to be given to Section 399 is only so as to further the object of relief to be given in a situation governed by Sections 397 and 398 of the Act and not to foreclose the options to an aggrieved person and to deny the very relief sought to be extended to a complaining minority shareholder/s envisaged under Section 397 and 398 of the Act.”

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

Petition under Section 397/398 – Importance of Prayer – a Case Study

Every one knows the object of section 397/398 of the Companies Act, 1956 and it is to bring an end to the matters complained of and to regulate the affairs of the Company in future. A great responsibility is cast on the Company Law Board under section 397/398 of the Companies Act, 1956 and it is not only an adjudication of dispute between two shareholding groups, but, it is to find ways as to how to put an end to the matters complained of and as to how to regulate the affairs of the Company. Only when it is not possible to put an end to the matters complained of or to regulate the affairs of the Company, the Company Law Board may finally ask one group to leave the Company by selling their shares at a fair price to be determined by the valuers and to be confirmed by the Company Law Board. Only when all these efforts to fail, it is recommended for winding-up of the Company. Several complications are there in a proceeding under section 397/398 of the Companies Act, 1956 and one should be careful while pursuing the remedy, presenting the case in view of the stakes normally involved in any Company. These internal disputes normally come in closely held private companies which operate on the principles of partnership. Strange arrangements can be seen in some closely held Private Companies and in some cases, completely ignoring that the Company is a separate juristic person, stake holders take funds from the Company and also use their personal funds to repay the liabilities of the Company. All these things practically happens in many companies and in view of these complications, giving a finding justifying principles of law and equity, would be a difficult task for the Company Law Board under section 397/398 of Companies Act, 1956. There exist complications in resolving disputes between the shareholding groups when it is a closely held private company in view of complicated internal transactions and arrangements, and there exist complications even in public companies in view of the interests of various stake-holders and the need of adhering provisions of the Act strictly.

Thus, in view of the stakes involved and complications, a proceeding under section 397/398 of the Companies Act, 1956, if pursued, is to be done carefully. Presenting the facts, filing the documents, bringing the additional facts to the knowledge of the Board from time to time, rebutting the allegations, the prayer part and making concessions and everything plays an important role in a petition filed under section 397/398 of the Companies Act, 1956 alleging oppression and mismanagement. I would like to present a case study highlighting at the importance of asking relief in the Petition under section 397/398 of Companies Act, 1956 and the relevant facts are as follows:

1. Two groups, with a clear understanding of business needs, formed a Private Limited Company.

2. In the Group-A there are two shareholders and from Group – B there are three shareholders.

3. Shareholders from each group has acted as promoters of the Company and subscribed to the Memorandum and Articles.

4. After incorporation, the groups had clear arrangements to run the Company and they have jointly taken the business decisions and operated Bank Accounts of the Company.

5. The business went on smoothly for some time and after few years; there was mistrust between the two groups. Group A is holding 40% shares in the Company while the Group B holds 60 % of shares.

6. The Group-B, being the majority, has taken certain business decisions without consulting Group-A. Certain resolutions were passed allegedly without informing Group-A.

7. At one point of time, Group-A has decided to come-out of the Company or to get the Company back to track without any mismanagement or prejudice to the members.

8. Group-A has filed a Petition under section 397/398 of Companies Act, 1956 against the Company and by making Group-B as parties to the proceeding.

9. In the Petition, Group-A has focused mainly on two issues viz., buying the shares of the majority at a fair price or in alternative, the majority should buy their shares at the fair price so that one group will ultimately be out of the Company and there will not be any problem in the Company.

10. In a proceeding before the Company Law Board, the Petitioner could establish that decisions were taken without any meeting, no minutes were maintained, financial statements are not filed, registers as required is not maintained and all these issues are further confirmed by the Commissioner appointed by the Company Law Board to authenticate the Books of Account of the Company.

11. In the final order of the Company Law Board in a petition filed by Group-A, the Company Law Board has come to the conclusion that the trust between groups is completely lost and as such though the Group-A could establish his case clearly, the Board has asked the Group-A to sell their shares to Group-B in view of the prayer sought.

Analysis:

In the above case, there could not have been any prayer for direction to the majority group to buy the shares of the Petitioner as it is not the intention of the Petitioner at all. The intention of the Petitioner is to get the disputes resolved and nothing more. Being the promoter of the Company, being the contributor of the Company’s growth and the being the victim of oppression and mismanagement by the majority and having established the case, the Petitioner may not want to quit form the Company, but, it is difficult to turn the order back in view of the relief sought in the Petition. These are all the complications with few simple things. Even in the absence of prayer relating to exit, the Company Law Board will consider all those options and submissions can be made at any time before the Board in the course of the proceeding. A good case of Group-A, the Petitioner, is being weakened in view of the specific prayer sought in the Petition. Even if the order is appealed, as the Group-A has expressed his willingness to exist specifically in the prayer, the same will be taken note of. In the absence of such a prayer and in the light of proving all the facts like no meetings, fictitious resolutions, no registers etc., Group-A could have pressed for preventive and remedial measures and infact, could have pressed for buying the shares of majority as there can not be any hard and fast rule in a proceeding under section 397/398 of Companies Act, 1956. A simple or may be, inadvertent mistake can really cost a lot and a relief under section 397/398 of the Companies Act, 1956 is to be carefully pursued and one should imagine the work-load of Company Law Board in remembering many issues and reading bulk of papers in each and every case. It may not be practically possible for any adjudicatory authority to read all the facts or re-collect all the facts pertaining to a case and especially in a case like oppression and mismanagement.

Note: the few facts highlighted do not represent any case I have represented or came to know and the facts are presumptive. The intention is to highlight the significance of ‘relief’ in a petition alleging oppression and mismanagement and nothing more.

Minority Shareholders In A Company – the protection?

I have been continuously focusing at the complications in the corporate world and especially about the protection to the shareholders in a Company. I have seen cases where the majority does everything in order to deny the rightful share of the minority shareholders or the group; or to make the company a shell company. I have seen the cases where companies with huge asset base functioning like a proprietorship concern without any regard to the corporate regulations or the provisions of the Companies Act, 1956. I know many instances and I have heard many shareholders alleging that their interest in the Company running to several crores is at stake with the oppressive attitude of the majority and the activities of mismanagement. Though it is felt that the listed Public Companies function well in view of the SEBI regulations, the role of SEBI in addressing the grievances of the shareholders and the listing agreement; there are serious grievances to the minority shareholders or group even in a listed Public Company. However, in view of the compulsory shareholding patterns in a listed Public Company in view of SEBI (DIP) Guidelines etc., the situation of the shareholders in a listed Public Company is different from a Private Limited Company. When it comes to the listed Public Companies, there is a chance of disposing their shares in the open market; but the same right is subject to regulations when it comes to the transfer of shares in a Private Limited Company. Again, it is a fact that no investor will be interested to buy the shares in a Private Limited Company if they do not trust at the existing shareholders. As such, there are serious issues concerning the rights of the minority shareholders in a Company though we feel that the rights are well protected with the clear provisions in the Companies Act, 1956 and other regulations.
I think that we have very good law dealing with the incorporation, formation and functioning of the companies in India though it requires few reforms. We have a law expecting the auditor to be independent and protection is given to his appointment considering the interests of all shareholders. We have the provisions of the Companies Act, 1956 as to how the books of accounts are to be maintained and every Company is supposed to follow the Accounting Standards prescribed by the ICAI while presenting the financial statements and other connected documents. We have the provisions where the minority or the shareholders of the Company can ask for the winding-up of the Company too when they feel that it is just and reasonable. We have a specialist forum like Company Law Board which can be approached under section 397/398 of the Companies Act, 1956 when there is oppression and mismanagement in the Company. The Company Law Board is provided with enormous powers in order to put an end to the matters complained of and in order to regulate the affairs of the Company. The Company Law Board can even order investigation into the affairs of the Company upon the specific request from the Petitioners in a Petition under section 397/398 of the Companies Act, 1956. Again, even if a shareholder is not qualified to approach the Company Law Board under section 397/398 of the Companies Act, 1956, he can very well approach the Company Court or can approach even the Civil Court asking for remedial measures at times. The legal framework may appear to be very clear, but, the practical issues deserve special consideration. In practice, many rules and regulations are violated in closely held companies especially and it is also very difficult to allege some malafides just because a Company could not follow the procedure strictly. As such, the issue of rights of shareholders and the protection to their interest is very complicated in view of the ‘majority rule’ and the protection to the minority against the oppression and mismanagement. I would like to expose my views as to what happens to the minority shareholders or the group when they approach the competent forum seeking relief and it is as follows:
Approaching Company Court:
Minority shareholders may approach the High Court or the Company Court when there exist a just and reasonable cause for asking to wind-up the Company. It is a fact that the High Court intervention in Company disputes has been exercised so cautiously and in many cases the remedy is effective. For example, handling any winding-up petition is a difficult thing and the Court consider the issue as to whether the Company is a going concern, the future prospects and the interests of the many other stake holders too. Despite the complications, the High Court has been exercising the power to wind-up the Company very cautiously. However, if the High Court entertains the petition to wind-up the Company from the Share holders very freely, then, the provisions providing for revival and rehabilitation and also the powers conferred on the Company Law Board to address the issues of oppression and mismanagement may not be justified at all. As such, in a very cautious approach, when the shareholders raise the issue of oppression and mismanagement by the majority before the Company Court, the Company Court may ask the shareholders to avail the alternative remedy of approaching the Company Law Board to put an end to matters complained of or to regulate the company affairs. As such, it will be difficult for the minority shareholders to convince the Company Court and get the redressel for oppression and mismanagement in the Company. This is the factual position according to me and my view. High Court, infact, has the track-record of providing speedy and effective remedies in corporate disputes. Due to technicalities as pointed-out, the minority shareholders may be asked to approach the Company Law Board very often when they raise the issue of oppression and mismanagement before the High Court.
Approaching Civil Court:
According to me, there is no bar on the shareholders of a Company in approaching the Civil Court seeking redressel at times. There is an attempt to make a specific provision to bar the jurisdiction of the Civil Court to entertain the corporate disputes in the proposed new Companies Act. However, as the law stands today, the shareholders can approach the Civil Court asking for a remedy against the management or the majority in the Company. The problem with approaching the Civil Court is that it is time consuming and technicalities to be followed at any cost. Again, the Civil Court may lack the expertise in dealing with the corporate disputes and there is a possibility of applying the provisions of the Companies Act, 1956 strictly and the result can be disastrous at times. As such, though there is no bar in approaching the Civil Court, the shareholders normally hesitate to approach the Civil Court and even if they approach Civil Court, at times, they may simultaneously approach the Company Law Board under section 397/398 of the Companies Act, 1956. As such, the minority may not get immediate and effective relief by approaching the Civil Court.
Approaching Company Law Board:
If the minority shareholders are qualified to approach the Company Law Board under section 399 of the Companies Act, 1956, they often approach the Company Law Board for oppression and mismanagement. The Company Law Board is provided with enormous powers to put an end to the matters complained of and to regulate the affairs of the Company. It is true that many may feel that the relief before the Board is not speedy and effective. It is also true that technicalities overtake the subjective scrutiny before the Board at times. There are complications and those are inevitable and to be addressed by the Board with the co-operation from the professionals and parties concerned. Based on the developments with the interpretation of Constitutional Courts, technicalities are now ignored under section 397/398 of the Companies Act, 1956. Again, even the Board gives lot of preference to ensure that the company functions smoothly if it is a going concern. Despite the complications and limitations, the only effective legal recourse available to the minority shareholders against oppression and mismanagement now is to approach the Company Law Board under section 397/398 of the Companies Act, 1956. I do strongly feel that the Company Law Board can put an end to matters complained of and can regulate the affairs of the Company. The issues pertaining to execution of the orders of the Company Law Board and the issues of contempt are to be looked into and to be addressed in the proposed new Companies Act. If the minority shareholders failed to get the protection from the Board and if the proceeding gets delayed without protection, then, the minority shareholders can never get justice and they may be forced to compromise with their rights and they may forced to agree for a settlement. I most of the cases, the minority shareholders leave the company by opting to sell their shares to the majority.
Approaching Arbitral Tribunal:
The issue as to whether the jurisdiction of the Company Law Board under section 397/398 of the Companies Act, 1956 be ousted upon showing some Arbitration Clause is a complicated issue to deal with. According to me, the issue of opting to approach the Arbitral Tribunal to settle the disputes between or among the shareholders is a complicated thing. It depends upon the facts and circumstances of the case. If all the stake-holders are agreed to get their disputes settled to a mutually acceptable Arbitration, then, there can not be any problem. However, there can be argument that the Arbitrator may not effectively consider the issue of public interest if he is provided with the powers of the Company Law Board under section 3976/398 of the Companies Act, 1956. The issue as to whether approaching an Arbitrator or Arbitral Tribunal is effective or not, will depend upon the facts and circumstances of each case. No hard and fast rule can be laid in this regard.
In view of laying emphasis on majority rule and in view of considering the functioning of the Company when the Company is a going concern, the minority shareholders should convince the appropriate and chosen forum as to the importance of their interest and should get the relief. There is also a criticism that the most comfortable way of stealing huge money is through relying on the technicalities in the provisions of the Companies Act, 1956 and is through misusing the settled principles of Company Law.
Note: the views expressed are my personal and a view point of view.