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
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.
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
