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 provides a relief to the minority against the majority if the
majority indulges in the oppressive acts and the acts of mismanagement. It is
not that every shareholder can avail the remedy available under section 397/398
of Companies Act, 1956 and section 399 specifically deals with the issue as
qualification to file a petition under section 397/398 of the Act. Section 399
of the Companies Act, 1956 substantially provides as follows:
“399. (1) The following members
of a company shall have the right to apply under section 397 or 398:-
(a) in the case of a company
having a share capital, not less than one hundred members of the company or not
less than one-tenth of the total number of its members, whichever is less, or
any member or members holding not less than one-tenth of the issued share
capital of the company, provided that the applicant or applicants have paid all
calls and other sums due on their shares.
(b) in the case of a company not
having a share capital, not less than one-fifth of the total number of its
members.”
As such, the issue of membership
in the Company is crucial under section 399. However, there may be companies
which are in reality run like proprietorship concerns or the partnership firms
without adhering to the corporate regulations and without bothering much about
the provisions of the Companies Act, 1956 etc. These are all family companies
or closely held companies normally. As such, if the issue of membership is seen
technically, then, the actual members or persons entitling for membership in
the Company may not be regarded as members under section 399 of the Companies
Act, 1956. Often these problems arise in a petition under section 397/398 of
Companies Act, 1956. The majority in some cases contend that the petition
itself is not maintainable on the ground that the petitioners do not qualify to
maintain the petition under section 397/398 based on the records maintained by
the Company and as such they will raise the issue of maintainability as a
preliminary issue. The issue as to how to entertain the objections with regard
to maintainability of the petition under section 397/398 of Companies Act, 1956
will normally depend upon the facts and circumstances of the case and there can
not be any hard and fast rule in this regard.
Dealing with the issue of membership
under section 399 of the Act in the light of section 41 of Companies Act, 1956,
the Hon’ble Karnataka High Court in Shri Balaji Textile Mills Pvt. Ltd. And
another. Vs. Ashok Kavle and Ors, 1989 66 CompCas 654 Kar, ILR 1988 KAR 1213,
was pleased to observe as follows:
“15. We will first consider the
provisions of section 41 of the Act which read as follows:
"41. (1) The subscribers of
the memorandum of a company shall be deemed to have agreed to become members of
the company, and on its registration, shall be entered as members in its
register of members.
(2) Every other person who agrees
in writing to become a member of a company and whose name is entered in its
register of members, shall be a member of the company."
16. The setting of this section
should be noticed. This section comes under Part II and Part II deals with the
incorporation of a company and matters incidental thereto though the marginal
note to section 41 reads:
"Definition of
`member'".
17. In our view, that by itself
does not throw any light on the scope of section 41 of the Act. The word
"member" is also defined under sub-section (27) of section 2 of the
Act. Sub-section (27) of section 2 of the Act reads as follows:
"`member', in relation to a
company, does not include a bearer of a share- warrant of the company issued in
pursuance of section 114."
18. The difference in the
language of section 2(27) of the Act which comes under the definition clause in
the Act and section 41 dealing with the membership of the company should be
noticed. In section 2(27), the word "member" is defined in a very
comprehensive manner and in relation to a company includes every type of member
but excludes a bearer of a share- warrant of a company issued under section 114
of the Act. But, in section 41 of the Act, under the heading "membership
of company", what is provided is that, in the case of subscribers to the
company, they should be deemed to have been members of the company and their
names shall be entered in the register of members. Under section 41(2) of the
Act, every other person who agrees in writing to become a member of the company
and whose name is entered in the register of members shall be a member of the
company. So, the first part of section 41 deals with deemed membership and the
second part of it deals with persons other than subscribers to the memorandum
of the company.
19. Now, the point for
consideration is whether this definition of "member" in section 41(2)
of the Act would, in any manner, control the meaning of the word "member"
in the other provisions of the Act which confer on these member certain
substantive rights as shareholders of the company, e.g., sections 397 and 398
of the Act under which this petition is filed. Chapter VI of the Act provides
for prevention of oppression and mismanagement of the minority shareholders of
a company. Under section 397 of the Act, the minority shareholders can approach
this court for relief against acts of oppression. Under section 398 of the Act,
they can approach this court for reliefs against acts of mismanagement. The
right to apply under sections 397 and 398 is controlled by section 399 of the
Act. So, for the purpose of considering whether an application under sections
397 and 398 of the Act is maintainable, the line of enquiry should be as to
whether the persons who claim relief under sections 397 and 398 of the Act come
within the scope of the provision of section 399 of the Act. Section 399 of the
Act reads as under:
"(1) The following members
of a company shall have the right to apply under section 397 or 398:
(a) in the case of a company
having a share capital, not less than one hundred members of the company or not
less than one-tenth of the total number of its members, whichever is less, or
any member or members holding not less than one-tenth of the issued share
capital of the company, provided that the applicant or applicants have paid all
calls and other sums due on their shares;
(b) in the case of a company not
having a share capital, not less than one- fifth of the total number of its
members.
(2) For the purposes of
sub-section (1), where any share or shares are held by two or more persons
jointly, they shall be counted only as one member.
(3) Where any members of a
company are entitled to make an application in virtue of sub-section (1), any
one or more of them having obtained the consent in writing of the rest, may
make the application on behalf and for the benefit of all of them."
20. A combined reading of
sections 397, 398 and 399 of the Act makes it clear that the meaning of the
word "member" of a company should be understood in the context in
which it is used and that meaning cannot be tagged on to the membership clause
in section 41(2) of the Act. The clause which is applicable to test whether a
member satisfies the requirement of section 397 and 398 of the Act would be
section 2(27) of the Act and not the provision of section 41(2) of the Act. The
language of section 41(2) of the Act as it existed prior to the amendment would
throw some light on the scope of this provision. Before section 41(2) was
amended, the language of that sub-section was "every other person who
agrees to become a member of the company." But, after the amendment, the
words "in writing" were incorporated. Why these words were introduced
in the Amendment Act of 1960 is found in the report of the Companies Act
Amendment Committee which reads thus:
"It has been brought to our
notice that in some cases, on the verge of liquidation, entries are made in the
register of members of the names of persons who never applied for shares, in
order to fasten liability on these persons as contributories. To avoid this
contingency, we suggest the addition of the words `in writing' after the word
`agrees' in section 41(2)." (para 38 of the report).
21. So, this amendment was
designed to protect the interests of persons who would have been otherwise
fastened with liabilities as contributories, even in the absence of any request
for allotment of shares of them. Perhaps there had been innumerable cases where
such liabilities have been passed on even in the absence of a request for
allotment. To avoid such a contingency, the committee made a recommendation
that in case of any dispute about allotment, that dispute could be
satisfactorily resolved by insisting on an application in writing for allotment
of shares. So, this amendment has a limited scope and has to be interpreted by
applying the rule of mischief as understood in the law relating to the
interpretation of statutes.
42. These observations will go to
show that if a shareholder who claims relief under sections 397 and 398 of the
Act satisfies the company court that he is a shareholder of a company by virtue
of allotment of shares in his favour which is evidenced not only by the
register of members maintained by the company but also by the statutory returns
and documents maintained and filed by the company, it is not open to the
contesting respondents to content that for the purpose of sections 397 and 398
of the Act, a shareholder must comply with the condition precedent stipulated
in section 41(2) of the Act.”
Again on the issue as to how
Section 399 of Companies Act, 1956 is to be interpreted when the
maintainability is questioned on the issue of membership, the Hon’ble Karnataka
High Court, in Vijayan Rajes S/o M.S.P. Rajes & Another Vs. MSP Plantations
Private Limited & Others, 2009 ILR(Kar) 3576, was pleased to observe as
follows:
“32. The reasoning given by the
Company Law Board does not appeal to us. If the finding is to be that the
persons presenting the petition do not qualify for presenting a petition under
Section 399 of the Act, no further question arises and the petition was to be
dismissed at the threshold. But the Company Law Board has viewed the working of
the Section 399 of the Act in the converse way, which is not a proper
understanding of the provisions of Section 399. But, on authority, it has been
established that for the purpose of examining as to whether the petitioning
members qualify for maintaining a petition under Section 399 of the Act, the
question to be looked into is as to whether the petitioners constitute the
requisite number of members or they had the requisite shareholding in the
company prior to the acts complained of. If the date of presentation of the
petition should be looked into in a technical way, it could defeat the very
purpose of the legislative enactment of Sections 397 and 398 of the Act, as the
overbearing majority shareholders can simply by highhanded action or even for
other purpose and by oppressive methods, dismember minority shareholders and
leave them with no remedies, as the dismembered minority shareholders
technically do not qualify for maintaining a petition under Section 399 of the
Act, being not member at all. As the minority shareholders will be complaining
only after the acts occurred and when they have been removed from the
membership of the company, the understanding and interpretation to be given to
Section 399 is only so as to further the object of relief to be given in a
situation governed by Sections 397 and 398 of the Act and not to foreclose the
options to an aggrieved person and to deny the very relief sought to be
extended to a complaining minority shareholder/s envisaged under Section 397
and 398 of the Act.”
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
