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
It is often been criticized that
section 397/398 of the Companies Act, 1956 is being used as a forum to settle
personal disputes between or among the shareholders. Taking advantage of the
proposition that the Company Law Board has elaborate powers under section
397/398 of the Companies Act, 1956 read-with section 402, the
shareholders/minority shareholders/petitioners approach the Company Law Board
for the disputes which ought to have settled before other forums like Civil
Court or the Magistrate Court. This is a constant criticism on the exercise of
jurisdiction by the Company Law Board under section 397/398 of the Companies
Act, 1956. Litigation is resorted often under section 397/398 of the Companies
Act, 1956 so as to stall a proceeding before the Debt Recovery Tribunal and at
times to get a transaction entered into between the Company and an outsider is
set-aside. The Constitutional Courts have constantly maintained as to what
constitutes ‘Oppression’ and what constitutes ‘Mismanagement’. Initially, there
was so much emphasis on the definition of ‘Oppression’ and ‘Mismanagement’ and
it is settled that an action of the majority should be ‘harsh and burdensome’
if it had to qualify for any remedial or preventive measures under section
397/398 of the Companies Act, 1956. But, now, there are judgments of
Constitutional Courts laying emphasis on the ultimate objective of section
397/398 of the Companies Act, 1956 and the Courts held now that any preventive
and remedial measures can be passed by the Company Law Board under section
397/398 of the Companies Act, 1956 even when there is no ‘Oppression and
Mismanagement’ in strict senso.
The very interesting thing under
section 397/398 of the Companies Act, 1956 is as to when the disputes arise
between the parties to a ‘Joint Venture Agreement’ or understanding and raising
these Joint Venture disputes pertaining to two separate legal entities in the
‘Joint Venture Company’ which is called ‘Special Purpose Vehicle’ very often.
The Joint Venture disputes and these disputes leading to a petition under
section 397/398 of the Companies Act, 1956 is always complicated and also
interesting. I am of the opinion that the understanding between the two
separate legal entities to the Joint Venture Agreement can be looked into in
respect of a petition filed in the ‘Joint Venture Company’ which is constituted
as a ‘Special Purpose Vehicle’ often. Infact, looking into the Joint Venture
Agreements or the understanding and interpretation therefor is so difficult. At
times, the clauses in the Joint Venture Agreement may have several meanings
leaving huge scope for litigation. Again, it is complicatedness of corporate
dealings that the business is done or the clauses in the Joint Venture
Agreement is dealt with in the e-mail communications and acted upon. Even when
the ‘Joint Venture Understanding’ is completely changed, it can happen through
E-mail Communications too and it is possible. This corporate practice and the
reality of corporate world makes it difficult for any one and especially the
Company Law Board to understand the background of the ‘Joint Venture
Understanding’ when it has to look into these business understandings in a
Petition under section 397/398 of Companies Act, 1956.
The another significant point
about the Joint-Venture understanding is that it can also substantially deal
with the ‘Joint Venture Company’ or the separate legal entity which is often
established as a ‘Special Purpose Vehicle’. This Company or the ‘Special
Purpose Vehicle’ carries-out the Joint Venture Understanding. The understanding
may refer as to the investment to be made in the ‘Special Purpose Vehicle
Company’, the representation in the Board etc. While any company in India
should be incorporated and run as per the provisions of the Companies Act, the
Articles of Association etc., a conflict may come when the clause in the
Joint-Venture Agreement comes in contrast to the express provision in the
Companies Act, 1956. The Companies Act, 1956 may deal with the proportionate
representation to the Board and other issues pertaining to appointment of
Directors etc, and the Joint Venture Agreement may have an interesting
arrangement when it comes to the representation in the ‘Special Purpose Vehicle
Company’ which can only be a Private Limited Company or a Public Limited
Company constituted under the provisions of the Companies Act, 1956.
Facts of the Case:
A Company has know-how in respect
of a particular thing and it is a Foreign Company being the research and
development as its strength. It wanted to expand its activity in India upon an
understanding and using the Indian policy of Foreign Direct Investment. It has
found-out a Private Limited Company in India which has expertise in
manufacturing. Both Companies have come together and held thorough discussions
and decided to form a separate company to act upon the understanding.
Accordingly, a separate ‘Special Purpose Vehicle Company’ has been constituted
in India. The foreign partner or the Company to the Joint-venture is interested
in getting their ‘intellectual property’ carefully guarded and it keeps a watch
as to the leakage of its secrets or the know-how. Thus, there was a detailed
business understanding between the Foreign Company and the Indian Company and
another Company as a ‘Special Purpose Vehicle Company’ has thus been
constituted. The main Joint Venture Agreement has got an Arbitration Clause to get
the disputes settled through Arbitration.
Even after the constitution of
the ‘Special Purpose Vehicle Company’, the communications went on between the
Foreign Company and the Indian Company constantly and it refers to the business
being carried-out by the separate ‘Special Purpose Vehicle Company’. There were
misgivings at times as to the implementation of the Joint-Venture Agreements,
there were complaints, there were explanations and even the accommodations were
made when it comes to complying with the clauses in the Joint Venture
Agreement. The business is carried-out this way for few years and suddenly, the
confidence between the two major groups has lost and the foreign player has
become aggressive and wanted to have a much more stake in the ‘Special Purpose
Vehicle Company’. The Foreign players insisted for an expansion of activity and
wanted an additional investment into the ‘Special Purpose Vehicle Company’. As
another group could not make an additional investment in the Company as
required, the Foreign Company has brought the additional investment into the
‘Special Purpose Vehicle Company’, got the authorized share capital increased
and its equity in the Company has thus been substantially increased. Now, the
other partner holds only a minimal equity in the ‘Special Purpose Vehicle
Company’. There is a complication in this entire issue regarding the
representation to the Bard of ‘Special Purpose Vehicle Company’. While the
initial Joint Venture Agreement has elaborately dealt with the representation
issue, the Articles say a different thing that the directors in the ‘Special
Purpose Vehicle Company’ are to be re-elected every year. Despite this clause
in the Articles, the Joint Venture Agreement or the understanding was acted
upon for some time and after the additional investment, the Foreign Player
wants a complete say in the ‘Special Purpose Vehicle Company’ and insists that
it should be run as a separate Company without giving too much priority as to
how the Company was constituted and the main and initial understanding. Even
when it comes to the initial and main understanding, there was enough and countless
communication in-between.
Now, referring to the additional
investment and allotment of equity and referring as to how the Joint-Venture
clauses are violated, the other Indian partner having a negligible stake files
a Petition under section 397/398 of the Companies Act, 1956 seeking various
relief against the majority in the ‘Special Purpose Vehicle Company’ and it
meant that the Indian player to the Joint Venture is questioning the Foreign
Company literally.
The entire narration in the
petition under section 397/398 of the Companies Act, 1956 deals with all
business issues, complaints etc. from the past so many years and despite these
issues and complaints, the Joint Venture Agreement was acted upon substantially
and the business was as usual for sometime.
Now, the petition is filed in
respect of the ‘Special Purpose Vehicle Company’ and it is very difficult to
allege ‘Oppression and Mis-management in respect of this Company. This Company
is professionally run though it carries-out the substance of the business
understanding between the foreign player and the Indian Company.
The Joint Venture Agreement or
the understanding contains an Arbitration Agreement. There can be an argument
that the issues under Joint Venture Agreement can be raised separately before
the Arbitrator or the Civil Court and these disputes can not constitute an act
of ‘Oppression’ and ‘Mis-management’. There can be counter argument that the
‘Special Purpose Vehicle Company’ was constituted solely based on the ‘Joint
Venture Understanding’ and as such those disputes should also be looked into
while dealing with a petition by the minority in the Company under section
397/398 of the Companies Act, 1956.
The above narration of a
hypothetical case is only an example as to how difficult it is to deal with
litigation based on a ‘Joint Venture Agreement’ under section 397/398 of the
Companies Act, 1956.
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
