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
Section 397/398 of the Companies
Act, 1956 guarantees a right to the minority to approach the Company Law Board
or the Tribunal seeking preventive and some remedial measures against the
majority in the Company when there is an ‘Oppression and Mis-management’ in the
Company. Only shareholders who are qualified under section 399 can approach the
Company Law Board (CLB) under section 397/398 of the Companies Act, 1956.
Though Constitutional Courts have tried to define as to what constitutes ‘oppression’
and ‘mis-management’, infact, it is subjective always. But, the Courts have
laid-down broad guidelines which are to be followed. Certain issues are settled
under section 397/398 of the Companies Act, 1956 despite the trend of granting
relief or interim relief to the Petitioners even when there was no ‘Oppression
and Mis-management’ in stricto senso. In view of the stakes involved in most of
the times, it is highly complicated exercise to deal with a petition under
section 397/398 of the Companies Act, 1956. It is often criticized that the
Company Law Board (CLB) is not effective in addressing the concerns of the
minority shareholders. It is also been criticized that the jurisdiction of the
Company Law Board is misused in most of the times and a negligent minority
tries to stall the functioning of the Company at times. As such, every effort
is normally made in making a good balance between the rights of the minority
against the oppression and the rights of the majority shareholders in taking
decisions without any hindrance and in the interests of the Company.
There were judgments on section
397/398 of the Companies Act, 1956 relying on technicalities even at the final
stage. Now, in my opinion, technicalities are ignored and the substance is
keenly noted in a petition under section 397/398 of the Companies Act, 1956.
For example, there were many decisions on the issue of ‘consent’ under section
399 of the Act and there were judgments saying that disputed facts can not be
decided by the Company Law Board and those require Trial. In the recent past,
there were no such pronouncements.
But, it is very often seen where
the shareholders approach the Company Law Board asking for injunction in
conducting AGM’s, against the proposed removal from Directorship and against a
particular resolution sought to be passed. It is true that unless the trust
between the groups is lost, shareholders will not go for litigation and will
not approach the Company Law Board. But, is it justified granting injunctions
preventing conduct of meetings and granting injunction against a particular
resolution?. It is again subjective and there can not be any straight-jacket
formula in this regard as courts have laudably noted. The most important thing
is that the materials placed before the Board and the averments should
establish a prima facie case of ‘oppression’. But, unless there is a prima
facie case of oppression or an action which is prejudicial to public interest,
no interim order or injunction can be granted. Noting on the same lines, the
Hon’ble High Court of Madras in N.Ram & others Vs. N.Ravi & others,
reported in CDJ 2011 MHC 1037, was pleased to observe as follows:
“44. On consideration, I find
force in the contention raised by the learned Senior Counsel appearing on behalf
of the appellants. The Hon'ble Company Law Board cannot issue injunction in
implementing the decision to be taken by the shareholders in its meeting,
unless the prima facie finding is recorded, that the decision is prejudicial to
the public interest or the company at large.
45. This view was taken by the
Hon'ble Company Law Board on an earlier occasion while rejecting the relief
claimed against the decision to do away with family succession and it was left
to the Board of Directors and shareholders, to consider this issue. It was
always open to the shareholders to take a decision, in view of the earlier
order.
46. The Hon'ble Company Law Board
also failed to take note of the fact that the respondents were yet to file
their counter, it was stated that the decisions to be taken in the EGM were
likely to take sometime, therefore, there was no urgency to pass impugned order
on 18th May itself, specially when the order could be made subject to the final
decision to be taken by the Hon'ble Company Law Board.
47. The Hon'ble Supreme Court in
the case of Life Insurance Corporation of India vs. Escorts Ltd and
others(supra) had categorically laid down that it is not open to the Company
Law Board to issue injunction with regard to functioning of the company.
48. As already observed above, in
the order passed, no finding has been recorded regarding the resolution of the
Board of Directors, that the matter placed before the EGM was prima facie
prejudicial to the public interest or functioning of the company.
49. It is also well settled that
the shareholders can only watch the proprietary interest in the company and
cannot object to the day to day decision and functioning of the Company.
50. In this case, by placing the
matter before the shareholders, the Board of Directors were seeking consent of
the shareholders. If any civil rights of the parties were likely to be
affected, then that can be subject matter of civil suit, but certainly will not
be falling under Sections 397 and 398 of the Companies Act.
51. The resolution also prima
facie cannot be said to be against the earlier order of the Hon'ble Company Law
Board, as the relief with regard to succession, was specifically declined,
leaving it open to the Board of Directors and its shareholders to take a final
decision.”
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
