Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
The Companies Act, 1956, though
it requires some reforms as mooted through Companies Bill, 2009, is one of the
finest legislations. Each provision or the section under the Companies Act,
1956 has a sound logic though there exist very few sections which are to be
deleted or modified suitably. The shareholders may not participate in
day-to-day affairs of the Company, but, still, their rights are protected as
every Company is supposed to maintain books of accounts, conduct the required
Board meetings, file the statutory returns and inform the shareholders of the
Company about its functioning and the development in a particular year through
annual returns and annual accounts which are also accompanied by the Director's
report and the Auditor's report. When we think as to how a concern, as an
incorporated company functions, the entire legal frame-work is interesting and
appears to be logically sound. It is also true that many listed public
companies follow the regulatory framework of Company Law in India scrupulously.
Many shareholders of a listed company may not even look at the affairs of the
Company in detail though they receive documents and communications from the
Company very often. Listed public Companies are well regulated in view of SEBI
regulations, listing agreement with Stock Exchanges and the continuous
supervision of SEBI and the Stock Exchanges.
Contrary to the functioning of
listed public companies, private companies or the closely held companies ignore
the regulatory framework of Company Law and they think that they are the
proprietors of the Company. Though, we very frequently use the word
"family company", there is no such description of a Company under the
provisions of Companies Act, 1956. It is also true that the private companies are
given liberty to have their own internal regulations through Articles of
Association and Share Transfers are regulated. While there is no problem with a
private company where the entire shareholding is held by a family or a group of
persons without any difference of opinion, practically, every company tends to
think about expansion of the Company and attraction of more investment into the
Company which results in the change in the shareholding pattern of a private
company very frequently. In many cases, the change in the shareholding pattern
of a company is preceded by an agreement between the Company and the investors.
As everybody is a human being with natural emotions and greed, there tend to be
some difference of opinion among the members which will end up with drastic
consequences. When the trust is lost among the shareholders or between two
groups in the Company, then, the consequences of breach of trust would be
disastrous. With the disbelief, one group tries to dominate the affairs in the
Company and serious differences thus erupt. It is a reality in corporate sector
that there tend to be some business secrets, and concealment etc.
Though there is no oppression or
mismanagement in the Company, taking advantage of the knowledge of business
secrets and concealment, a group of shareholders who qualify under section 399
of the Companies Act, 1956 approach the Company Law Board under section 397/398
of the Companies Act, 1956. As everybody knows, section 397/398 of the
Companies Act, 1956 meant to provide a preventive measure for the protection of
the rights of the minority shareholders. Company Law Board has been conferred
with elaborate powers under section 397/398 of the Companies Act, 1956 in order
to put an end to the matters complained of while it is also true that there are
express limitations on the powers of Company Law Board under section 397/398 of
the Act. There are so many lengthy judgments on section 397/398 of the
Companies Act, 1956 in view of complications and the stakes involved. It will
never be an easy task to understand a company dispute and pass orders and
naturally there will be delay in getting the required orders under section
397/398 of the Companies Act, 1956. The general opinion of shareholders in a
private company when they approach the Company Law Board under section 397/398
of the Companies Act, 1956 is that the protection to their rights as envisaged
under section 397/398 is not effective.
Few concerns of various
shareholders who approach the Company Law Board and who require a remedial
measure, as I perceive, are as follows.
Concerns or the feelings of
Majority Shareholders or group:
1. Majority tends to rely on
majority rule and they will never be happy when a minority tries to trouble the
majority by leveling allegations.
2. Majority feels that though
they have not committed any act of oppression and mismanagement, the minority
shareholders who were privy to business secrets take advantage of those things
and tries to trouble the majority.
3. Majority feels that they never
want a minority group who intends to trouble the Company; however, acquiring
the shares of the minority will be a difficult exercise as there will be
unreasonable bargaining and financial difficulties.
4. Majority feels that it has
become so easy for a group of shareholders or a minority group in the Company
to trouble the majority as a mere allegation can do all the damage.
5. Majority truly feels that they
are not provided with any remedy under the provisions of the Companies Act,
1956 thinking that majority rule prevails in the Company and the majority can
take any decision in the AGM.
6. Majority never wants to expose
themselves as powerless and a group which is not able to deal with the minority
and as such they may have to face the obstructions by the minority continually.
7. Though the majority in a
Company too can approach the Company Law Board under section 397/398 of the
Companies Act, 1956, they may not be able to do so when already a minority
group has approached the Board seeking some measures under section 397/398 of
the Act. When both the majority and the minority allege something, naturally,
the conclusion will be that there exist a deadlock in the Company and
consequences will follow. Majority never wants such a situation.
8. Majority group always gets
troubled with the filing of fictitious forms with the Registrar of Companies
(ROC) and they are still not aware of the remedies to get the fictitious forms
removed from the MCA portal. This has become a serious issue in most of the
Companies and the issue requires a careful consideration for suitable reforms
in law and the practice.
9. Majority feels that the
applications under section 397/398 of the Act are loosely entertained and pendency
of a petition under section 397/398 of the Act has its own consequences on the
functioning of the Company.
Concerns or the feelings of
minority:
1. Minority shareholders too have
many grievances at the preventive and remedial measures available to them when
they are oppressed and the company is mismanaged.
2. Minority shareholders were of
the opinion that the remedial and preventive measures provided under section
397/398 of the Companies Act, 1956 are not effective.
3. Minority shareholders feel
that there is so much delay in getting the required orders from the Board under
section 397/398 of the Act.
4. Minority shareholders feel
that the orders of the Company Law Board are read between lines by the majority
and getting the orders implemented has become a bigger issue.
5. Minority shareholders feel
that there are express limitations on the powers of the Company Law Board under
section 397/398 and as such they have to approach many forums on the same issue
simultaneously.
6. Minority shareholders are
scared to approach the Civil Court as they feel that the procedure before civil
court is hectic and prolonged.
7. Minority shareholders feel
that though they were willing to disassociate from the Company, the exist
option is not reasonable with all undervaluation in most of the cases.
Reforms required:
Than ever before, the issue of
filing fictitious forms or uploading fictitious forms with MCA portal has
become a very serious issue now. The ROC is advising the Company to approach
the Company Law Board or the Court and get an order even when an apparent
illegality with regard to filing is pointed-out. The majority is hesitant to
say that they are being oppressed by the minority though it can happen
practically. With the existing legal position, in many cases, the shareholders
are forced to approach simultaneous forums and the issue needs to be
effectively addressed. The issue of simultaneous proceedings is sought to be
addressed in the proposed Companies Bill which contain a specific bar on the
Civil Courts to entertain company disputes or matters. There are complications
in course even with the specific bar on the jurisdiction of Civil Courts. Such
a bar under other special legislations like SARFAECI Act, 2002 can be effective,
but, I don’t think that the bar on Civil Courts can be effective under the
proposed Companies Bill. The issue of removing fictitious forms is to be
addressed on urgent basis. The proceedings of the Company Law Board now and the
National Company Law Tribunal in future should be really effective. With many
directives of the Supreme Court now on the constitution of National Company Law
Tribunal, we hope that the situation will change. We need to have active and
knowledgeable presiding officers who are independent in discharge of their
functions. A difference between the proceedings of the Company Law Board and
the High Court is apparent now and we can see shouting in Company Law Board and
it is very rare to see shouting before the High Court. All these issues appear
to be very small, but, a lot to convey. The proposed National Company Law
Tribunal can never be a High Court, but, in reality, the National Company Law
Tribunal discharges the functions of High Court as most of the powers now
exercised by the High Court under the Companies Act, 1956 are sought to be
transferred to the proposed National Company Law Tribunal.
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com