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
Company Law Board exercises very
important functions under section 397/398 of the Companies Act, 1956 providing
relief to the shareholders against ‘oppression and mis-management’ in the
Company. When a group of shareholders are oppressed in any company or the
company is mis-managed causing loss to the interests of the shareholders, shareholders
very frequently exercise the option of approaching the Company Law Board under
section 397/398 of the Companies Act, 1956 if they are qualified to do so under
section 399. The shareholders have the option and can even approach the High
Court seeking to wind-up the Company on ‘just and equitable cause’. In
appropriate cases, the shareholders do approach even the Civil Courts seeking
some relief against the Company though there always remains a confusion about
the jurisdiction of Civil Court in dealing with the cases of ‘oppression and
mis-management’ and also there is a strong belief that it is extremely
difficult to get speedy relief from a Civil Court. In the cases of ‘oppression
and mis-management’, the affected shareholders expect immediate relief in order
to get their interests in the Company protected and this is the reason why the
shareholders approach the Company Law Board under section 397/398 of the
Companies Act, 1956 where the CLB is supposed to ignore technicalities and is
supposed to ‘put an end to the matters complained of’.
In the process of adjudication
under section 397/398 of the Companies Act, 1956 and where mis-management in
the Company is alleged, the applicant shareholders can even make many other
group companies or third parties etc., as parties to the petition and can be
seeking to get certain transactions cancelled. This happens when the majority
group in the Company or the directors in actual control of the Company, deal
with the properties and funds of the company in an illegal manner and with the
ultimate intention of siphoning off funds of the Company. These things are very
frequently alleged in respect of ‘closely-held companies’ and rarely seen
in-respect of ‘Listed Public Limited Companies’ in view of the
shareholding-pattern and the authority of the SEBI to look into certain issues
and the authority of the stock-exchanges where the shares are listed if it is a
listed Company.
In appropriate cases, the Company
Law Board can be passing suitable orders under section 397/398 of the Companies
Act read-with section 402 of the Act and these orders can affect even the third
parties including Banks at times in my opinion.
Competency of Company Law Board
to interfere with SARFAESI proceedings:
The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act) is meant to enable the Banks to speedily recover their
‘secured dues’ without approaching any Court or Tribunal and even when there
exists a grievance to any person affected, he can only file an appeal under section
17 of SARFAESI Act, 2002. It is settled that when a Bank initiates proceedings
against a Company under SARFAESI Act, 2002, the aggrieved party can give their
objections to the Bank, can seek mandatory reply from the Bank under section 13
(3A) and if they are not satisfied at the reply given by the Bank, the
aggrieved party can file an appeal under section 17 of the SARFAESI Act, 2002.
There is a specific provision under section 34 of SARFAESI Act, 2002 that no
Civil Court can interfere with SARFAESI proceedings and even the High Court
exercises caution in interfering SARFAESI proceedings though there can never be
a complete bar on the jurisdiction of High Court under section 226 and 227 of
Constitution of India with regard to the proceedings initiated by Public Sector
Banks or Banks. However, in view of the perceived failure of the Debt Recovery
Tribunals in providing speedy and effective relief, High Courts can entertain
challenge to the SARFAESI proceedings in appropriate cases as otherwise; there
will not be any relief to the aggrieved even when the Bank proceeds illegally
and unreasonably. Though, Civil Court’s jurisdiction is not completely barred
in respect of SARFAESI proceedings in view of the scope established with Mardia
Chemicals Case and other subsequent cases, it is highly difficult to convince
any Civil Court and get the relief against the Bank. Again, aggrieved are often
afraid to approach the Civil Courts in view of the lack of expertise on the
part of Civil Courts in dealing with SARFAESI issues, the technicalities, the
expenses and the delay involved.
As such, though section 34 of the
SARFAESI Act, 2002 specifically deals with the jurisdiction of Civil Court, it
is implied that no court or the forum can interfere with the proceedings initiated
by the Bank under SARFAESI Act, 2002. This is established even when the
liquidation proceedings are pending against a Company and the Bank will be
proceeding against the ‘Secured Assets’ even when the liquidation proceedings
are taking place against the Company.
Under these circumstances, it
would be interesting to look into the jurisdiction of Company Law Board to pass
any order or orders under section 397/398 of the Companies Act, 1956 affecting
the proceedings initiated by the Bank against the Company. Two things are very
important in this regard and those are as follows:
a. One is that the
power of the Company Law Board to pass orders section 402 of the Companies Act,
1956 affecting the third party transactions and agreements.
b. Second is that the
relief provided to the affected person under section 17 of the SARFAESI Act,
2002.
Though it is frequently referred
that the Debt Recovery Tribunal can look into all issues under section 17 of
the Companies Act, 1956, the Tribunal may not be able to effectively look into
certain issues. For example, there is a precedent now that the rights of
Tenants under the Tenancy Laws made by the State Governments will prevail over
the rights of the Bank under SARFAESI Act, 1002; and if the Bank wants to get
any tenant vacated from the premises; it has to mandatorily approach the Rent
Control Tribunals. Same is the case, where the Bank can not claim the complete
ownership of the ‘Secured Asset’ and these issues arise when the property
mortgaged is a ‘Joint Family Property’ and the Bank was negligent in accepting
the property as a security. In these cases, the appropriate authority to look
into the rights of the members of a family in the property is the Civil Court
and the Debt Recovery Tribunal may not be competent enough to look into
partition and related property issues. These are the complications with which
there was a precedent initially with regard to SARFAESI proceedings that the
Debt Recovery Tribunal is supposed to only look into the fact as whether the
Bank has followed the procedure under SARFAESI Act, 2002 or not. But, this
precedent now has changed and the authority of the Debt Recovery Tribunal under
section 17 of the Act is expanded at-least as a matter of principle
irrespective of practical issues and difficulties.
Like-wise, a group of
shareholders in a Company may allege mis-management in the Company and can
oppose any proceedings initiated by the Bank against the Company under the
provisions of SARFAESI Act, 2002. If it is established that the Bank is
negligent and is also at fault while sanctioning the loan to the Company, the
minority shareholders can definitely be opposing the proceedings initiated by
the Bank against the Company. For example, if the Bank grants loan to the
Company upon certain terms without bothering at the regulations under Companies
Act, 1956 and without looking into the fact as to whether the people processed
the loan transaction with the Company are authorized to do so or not, then,
certainly, the minority shareholders would even be questioning the Bank and the
Bank can not say that they are not supposed to look into any rules and
regulations; and they will only look into the security provided. This argument
may not be accepted always. There may be a contention here that even the
minority shareholders or a shareholder of a Company can approach the Debt
Recovery Tribunal under section 17 of the Companies Act, 1956 and as such,
Company Law Board can do nothing with regard to the proceedings initiated by
the Bank against the Company under SARFAESI Act, 2002. It is true that the
shareholders can approach the Debt Recovery Tribunal under section 17 of the
SARFAESI Act, 2002 according to me if they could establish that their interests
in the Company are affected and the Bank is wrong in sanctioning the loan
without looking into the required issues. However, the Debt Recovery Tribunal
may not be competent enough to look into the corporate rights of the
shareholders and the Company Law principles. The Debt Recovery Tribunal can say
that the affected shareholders can only proceed against the Company or the
management and they can approach the High Court seeking winding-up and can
approach the Company Law Board alleging mis-management. The Debt Recovery
Tribunal may be right in its contention and it’s a very complicated issue and I
don’t think that these issues would arise frequently, but, there is a
possibility.
The issues of Bank negligently
sanctioning loans to the Company and the interests of the shareholders, is very
important when the Bank intends to proceed against the Company beyond the
security provided. Even when the Company
gives security, if it is wrongful on the face of it and if the minority group
or the shareholders are affected because of it, then, the minority group or the
shareholders can definitely be questioning even the loan transactions with the
Bank.
If any individual guarantees the
repayment of loan given to the Company and individual properties were
mortgaged, then, the mortgagor may have no option if he feels aggrieved, except
to approach the Debt Recovery Tribunal or the High Court in appropriate cases
seeking relief. The issue is when the Bank proceeds against the Company assets
and the Company and the interests of the shareholders in the Company are
affected. This is certainly a very complicated issue to deal-with.
Few important points to be noted:
1. It can not be said that the Company Law
Board can not pass orders under section 397. 398 and 402 of Companies Act
affecting the SARFAESI proceedings initiated against the Company.
2. Even if there is a mis-management in the
Company, if the Bank has taken due and reasonable care while sanctioning the
loan to the Company, then, the CLB may hesitate to interfere with any SARFAESI
proceedings initiated by the Bank against the Company.
3. Though the Debt Recovery Tribunal can look
into all objections under section 17 of the SARFAESI Act, 2002, it may not be
competent enough to deal with the issues of ‘oppression & mis-management’
requiring expertise and there can be a clear link at times between the SARFAESI
proceedings against the Company and the interests of the minority group as
protected under Companies Act, 1956.
4. Though every shareholder is entitled for
certain rights in the Company and for the relief at times, it is certainly
complicated to say that the shareholder/s not qualified to approach High Court
seeking liquidation etc. and shareholders not qualified under section 397/398
of the Companies Act, 1956, can approach the Debt Recovery Tribunal under
section 17 of the SARFAESI Act, 2002. It is important in the light of a single
shareholder alleging that his interests in the Company are affected with the
Bank proceeding against the Company.
5. If the Bank’s sanction of loan to the
Company is clear and independent of other issues in the Company, then, the
allegations of mis-management in the Company may not affect the rights of the
Bank in proceeding against the Company or the security provided.
6. The Bank’s interests can in no way be
affected by any orders of the Company Law Board when the loan sanctioned to the
Company is guaranteed with the sufficient assets of individuals and the CLB in
those cases, may hesitate to interfere with the SARFAESI proceedings initiated
by the Bank.
7. Except the issues of fraud, gross
negligence and the interests of the minority group in the Company, no other
issues can be raised against the Bank if Bank is involved in a proceeding under
section 397, 398 and 402 of Companies Act, 1956.
8. There are no established precedents so far
on these issues, but, these issues are very significant and real with the
routine commercial transactions between the Banks and Companies.
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
