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
Shareholders qualifying under
section 399 of Companies Act, 1956 can approach the Company Law Board under
section 397/398 seeking preventive and remedial measures against the oppression
and mis-management in the Company. Though, section 397/398 is meant to provide
relief to the minority shareholders against the actions of the majority, even
the majority can approach under section 397/398 of the Companies Act, 1956 and
at times, the majority may not be in actual control of the company or the
majority becomes artificial minority. It is settled that the petitioner under
section 397/398 of the Companies Act, 1956 has to establish a case of
‘oppression & mis-management’ and these events to be continuous and an
isolated incident can not entitle the petitioner to maintain a petition under
section 397/398 of the Companies Act, 1956. There were many cases which went up
to Supreme Court on the issue of maintainability; however, the interpretation
on ‘maintainability’ has significantly changed. Even an isolated incident
prejudicial to the interests of the minority shareholders can be agitated under
section 397/398 of the Companies Act, 1956 now.
The foremost important thing for
the minority shareholders approaching CLB under section 397/398 is to prove
that there is a prime facie case of ‘oppression and mismanagement’ and other
required things are pleaded technically. Any action by the majority in the
Company which is prejudicial to the interests of the minority be seen as
‘oppression and mismanagement’ in the Company. In many cases, it is very
difficult to establish the case of ‘oppression and mismanagement’ as the
minority will not be having any control in the company, access to books of
accounts and the information. The minority normally makes-out a case of
‘oppression and mismanagement’ against the majority on the basis of allotment
of shares diluting the existing shareholding and on the basis of figures shown
in the ‘financial statements’. The minority shareholders normally also depend
on the ‘non-filing of returns’ and the required documents with the ‘Registrar
of Companies’ in order to make a point that the activity of the management in
the Company is suspicious and prejudicial to the interests of the minority. It
is very easy for the minority shareholders approaching Company Law Board under
section 397/398 to prove their case when the Company is not adhering to the
principles of ‘corporate governance’ or due compliance of company regulations.
Even after establishing the prime
facie case of ‘oppression and mis-management’, it is the responsibility of the
Petitioner approaching CLB to prove the case against the majority in order to
get the relief sought. It is very difficult for the minority shareholders to
technically establish their point to the CLB as the minority shareholders
normally allege that the figures given in the financial statements are not true
and are not supported by any documentary proof. It is difficult for the Company
Law Board to ascertain the veracity of the figures given in the financial
statements unless those are verified by the competent and independent
professionals. The majority can be raising many technical objections if the
minority wants to further look into the audited accounts. However, unless facts
are established and unless the CLB facilitates the minority shareholders to get
the required information from the majority, it would be highly difficult for
the petitioners to establish their case. Despite all the technical objections,
there is no bar on the powers of Company Law Board to pass any order under
section 397/398 and under section 403 of the Companies Act, 1956 in order to
ascertain the facts and pending the disposal of main Company Petition. Normal
rules of Civil Procedure have no application to the proceedings of Company Law
Board and the CLB is entitled to pass any order under section 397/398 in order
to prevent the continuance of ‘oppression and mismanagement’.
Dealing with a case of order of
‘investigative audit’ in the light of section 237 (b) in a case under section
397/398 of the Companies Act, 1956, in a judgment dated 21.2.2011 in Company
Appeal No.6 of 2009 in K.Muthusamy vs S.Balasubramanian, the Hon’ble Madras
High Court has observed as follows:
“84. A careful consideration of
the statutory provision and the decisions discussed in the previous paragraphs,
make it clear (i) that the power under Section 237(b) is administrative in
nature, in view of the observations of the Apex Court in paras 10 and 61 of the
judgment in Barium Chemicals and in para 3 of the decision in Rohtas
Industries; (ii) that the power conferred by the provisions can be exercised
even suo motu by the Company Law Board and (iii) that while testing the
correctness of an order of the Company Law Board, directing investigation, the
powers of the Company Court are restricted to the parameters laid down in the
above decisions.
85. Once it is seen that the
power is administrative and can be exercised even suo motu, there is no merit
in the contention that in a petition under Sections 397 and 398, the Company
Law Board was not entitled to appoint an Auditor to conduct an investigative
audit. The Company Law Board, before appointing an Auditor, has taken note of
the existence of the circumstances, as stipulated by clauses (i), (ii) and
(iii) of Section 237 (b). In view of the decision of the Apex Court in Rohtas
Industries, I have also examined independently, whether the circumstances
pointed out by the Company Law Board existed or not and I am satisfied that
they did. Therefore, the fourth contention on the scope of the power under Section
237(b) cannot be sustained.
86. In any case, the Company Law
Board has not exercised the power to direct an investigative audit, suo motu in
this case. It has done so only on a petition filed by the respondents 1 to 5
herein. The company petition filed by the respondents 1 to 5 herein was not
only under Sections 397 and 398, but also under Sections 402 and 403 read with
Sections 235 and 237 and Schedule XI. Therefore, all that was required of the
Company Law Board was to see whether there were circumstances suggesting the
existence of the contingencies stipulated in clauses (i) to (iii), warranting
the Board to form an opinion under Section 237 (b). It is clear from the
materials on record (i) that the Board actually formed an opinion; and (ii)
that the opinion was based upon the parameters prescribed in the three clauses
under Sections 237 (b). Since this Court has the power, in view of the decision
in Rohtas Industries, to satisfy itself about the existence of those
circumstances, I have also independently analysed under question No.3, the
existence of those circumstances. Therefore, the contention based on the scope
of Section 237 (b) is not well founded.”
The Court has further observed
that:
“89. Moreover, the powers of the
CLB have to be understood in the light of various provisions of the Act. By
virtue of Section 406, the provisions of Sections 539 to 544 are made
applicable to proceedings under Sections 397 and 398, in the modified form as
set out in Schedule XI. The difference in the language employed is not very
substantial. While Section 539 as found in the body of the Act, uses the
expression ‘contributory of a company’; Section 539 in Schedule XI, uses the
expression ‘member of a company’; Section 539 as found in the body of the Act,
applies to a company ‘which is being wound up’; while the corresponding Section
in Schedule XI applies to a company in respect of which an application under
Section 397 or 398 has been made. Similarly, Section 540 as contained in the
body of the Act, applies to a company which is subsequently ordered to be wound
up or which subsequently passes a resolution for voluntary winding up. But the
corresponding provision in Schedule XI, applies to a company in respect of
which an order under Section 397 or 398 is made subsequently.
90. Therefore, it is clear that
the powers conferred upon the winding up Court, in relation to ‘antecedent
offences’ under Sections 539 to 544, have been extended to proceedings under
Sections 397 and 398, by virtue of Section 406, in a modified form as found in
Schedule XI. Since the modifications are only cosmetic in nature, it is clear
that the Company Law Board has similar powers in relation to proceedings under
sections 397/398. In such circumstances, the impugned order passed by the
Company Law Board, cannot be said to be vitiated by any error of jurisdiction.”
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
