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
It is known that section 397/398
of Companies Act, 1956 substantially provide relief to the minority
shareholders/shareholders against the oppression/mismanagement by the Company
or the Majority Shareholders in the Company. Though it is not clear and can not
be clear unless the law is suitably amended as to the nature of the powers
exercised by the Company Law Board, it can be easily ascertained that the
powers of the Company Law Board under section 397/398 of the Companies Act,
1956 are preventive in nature substantially. Many shareholders feel that the
Company Law Board is to be provided with elaborate powers to deal with all
issues when the disputes arise between two groups in the Company or among the
shareholders. When the position as to the powers of Company Law Board is not
clear, then, at times, the shareholders approaching the Company Law Board may
suffer irreparable damage and they have to approach different forums seeking
different relief aimed at preventing the oppression and mismanagement by the
majority in the Company.
Despite the feeling in many
petitioners under section 397/398 of the Companies Act, 1956 that the remedy
provided is not effective, the shareholders are left with no option except to
approach the Company Law Board seeking preventive measures and when the Company
is a going concern. When the Company is a going concern, it is not easy for the
minority group to straight away ask for winding-up of the Company and even if
the Company Court is approached seeking winding-up of a going concern on ‘just
and equitable’ ground, the Company Court may advice the petitioners to avail
the alternative remedy provided under section 397/398 of the Companies Act,
1956.
There are many complicated issues
in a proceeding under secti8on 397/398 of the Companies Act, 1956. In order to
approach the Company Law Board under section 397/398 of the Companies Act,
1956, the Petitioners should qualify under section 399 of the Act. There is a
procedural requirement to present the petition under section 397/398 like
filing the proof of holding/membership and filing the consent showing that the
Petitioners representing the Company have the consent of other Petitioners.
There are many precedents on the issue of consent too. While there can be
serious objection as to the maintainability of a Company Petition under section
397/398 of the Companies Act, 1956 when the Petitioners are not qualified under
section 399, section 399 is also sought to be relied on technically and
substance is ignored at times. The important issues under section 399 of the Companies
Act, 1956 are as follows:
1. The Company or the majority
can object to the maintainability of the Company Petition at the initial stage
on the ground that the Petitioners are not qualified under section 399:
When the maintainability of the
Company Petition under section 397/398 is questioned relying on section 399 at
the initial stage itself, then, the Company Law Board can look into the issue
and determine maintainability. If certain facts like holding and membership is
disputed by the two groups, then, the Company Law Board can entertain the
Petition provided other requirements are fulfilled and the issue of
maintainability can be decided finally.
2. The Company or the majority
can raise the issue of maintainability of the Petition under section 399 in the
middle of the proceeding or at the final stage:
In my opinion, it may not be
correct to entertain the issue of maintainability relying on section 399 if the
Company or the majority is silent on the issue of maintainability initially. If
there is a dispute from the beginning as to the maintainability of the Company
Petition, then, such plea can be entertained at the final stage as required. In
a proceeding under section 397/398 of the Companies Act, 1956 can not be
equaled with other civil proceeding and the remedy provided is extraordinary
and with great object dealing with the corporate world.
3. As a proceeding under section
397/398 tend to be pending for a considerable time in view of various
complications and when few of the Petitioners have died during the proceeding,
the issue of consent from the legal representatives becomes debatable:
It is a technical objection and
it should be entertained so carefully keeping in view of the object of the
provisions and other relevant facts into consideration. When Petitioners are
substantially before the Board despite the death of few petitioners, the
Company Law Board can proceed with determining the Company Petition. Contrary
to that, when the substantial number of Petitioners are died and the legal
representatives do not show any interest in continuing the proceeding against
the Company or the majority, then, the Petition can definitely be dismissed. A
straight principle in this regard can not be laid and it depends upon the facts
and circumstances of each and every case.
I would like extract the
references in a judgment of Hon’ble Supreme Court on the issue of technical
deficiencies in filing the Petition and on the issue of interpretation of
section 399 of Companies Act, 1956 and those references are as follows:
Supreme Court of India in J.P.
Srivastava & Sons Pvt. Ltd. & Others Vs. M/s. Gwalior Sugar Co. Ltd.
& Others (2004 (9) Scale 60 : 2005 AIR(SC) 83 : 2004 (9) JT 507 : 2005 (1)
SCC 172 : 2004 (7) Supreme 794, 2004 (122) CC 696):
“Given these powers in the CLB,
we cannot hold that non-compliance with one of requirements in Sri No. 27 in
App. III of Reg. 18 goes to the very root of the jurisdiction of the CLB to
entertain and dispose of a petition under Sections 397, 398. All that
regulation 18 requires by way of filing of documents, is proof that the consent
of the supporting shareholders had in fact been obtained prior to the filing of
the petition in terms of Section 399(3). It cannot be gainsaid that it is open
to the persons opposing the application under Sections 397 and 398 to question
the correctness of an assertion as to consent made by the petitioner. It is
equally open to the petitioner to provide evidence in support of the plea taken
in the petition. If of-course the objection to the maintainability is taken by
way of demurrer, the CLB can decide the issue on the basis of the averments
contained in the petition alone, accepting the pleas therein as correct. But
where the CLB takes into consideration facts outside the petition as it has
done in this case, it cannot foreclose the petitioner from supporting its case
in the petition on the basis of evidence not annexed thereto. Since the CLB
calculated the total shareholding of the company including preference shares
based on the allegations contained in the respondent No.8's application, it was
for the CLB to determine the issue of actual prior consent on evidence. This
view finds support from Reg. 24 which says:
24. Power of the Bench to call
for further information / evidence: The Bench may, before passing orders on the
petition, require the parties or any one or more of them, to produce such
further documentary or other evidence as the Bench may consider necessary:-
(a) for the purpose of satisfying
itself as to the truth of the allegations made in the petition; or
(b) for ascertaining any
information which, in the opinion of the Bench, is necessary for the purpose of
enabling it to pass orders on the petition.”
On the issue of interpretation:
“The object of prescribing a
qualifying percentage of shares in petitioners and their supporters to file
petitions under Sections 397 and 398 is clearly to ensure that frivolous
litigation is not indulged in by persons who have no real stake in the company.
However it is of interest that the English Companies Act contains no such
limitation. What is required in these matters is a broad commonsense approach.
If the Court is satisfied that the petitioners represent a body of shareholders
holding the requisite percentage, it can assume that the involvement of the
company in litigation is not lightly done and that it should pass orders to
bring to an end to the matters complained of and not reject it on a technical
requirement Substance must take precedence over form. Of course, there are some
rules which are vital and go to the root of the matter which cannot be broken.
There are others where non-compliance may be condoned or dispensed with. In the
latter case, the rule is merely directory provided there is substantial
compliance with the rules read as a whole and no prejudice is caused.”
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