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 proceedings
under section 397/398 of the Companies Act, 1956 are always complicated. There
will often be criticism that the jurisdiction of Company Law Board (CLB) under
section 397/398 of the Companies Act, 1956 is being misused. At the same time,
there is criticism on the effectiveness of the jurisdiction being exercised by
the CLB in order to prevent oppression and to put an end to the matters
complained of. In many cases, the CLB may not be able to come to a quick
conclusion as to what is going-on in the Company and the CLB may hesitate to
pass drastic orders against the Company unless it is convinced of the issues
after listening to the Company or the majority in the Company. Any adverse
order against the Company will have its own implications and the functioning of
the Company and the business prospects may also come to standstill at times
with the proceedings of the Company Law Board. While the non-adherence to
corporate governance and the technical issues are pitched against the Company,
the CLB may not be able to pass any orders based on mere non-compliance of
statutory provisions of law. The CLB often looks at equity and in some cases;
the CLB may have to look at complicated legal issues and variety of
arrangements among shareholders or the groups in the Company.
When a group comes to Company Law
Board alleging oppression and mismanagement against the majority in the
Company, and if the two groups see no scope for compromise, then, there will be
hectic and continuous litigation in-respect of the affairs of the Company. When
the issue of oppression and mismanagement is contested strongly, then, the
minority or the petitioners may be presenting several interim applications
praying the Company Law Board to direct the majority not to exercise any powers
which will affect interests of the minority pending litigation. Under section
397/398 of the Companies Act, 1956, any number of interim applications can be
filed and in order to put an end to the matters complained of, the CLB is
empowered to pass any orders within the purview of settled legal principles
with regard to the powers of Company Law Board under section 397/398 of
Companies Act, 1956.
There may be a case where the
minority presents the petition with limited facts and the minority may come to
know several issues after filing of the Company Petition and it is very much
possible. As and when the information comes, the minority can also be changing
their stand and may want to take advantage of the fresh details. This ground
reality in respect of many closely-held companies or the family companies,
makes the functioning of Company Law Board very complicated. It is very
difficult for the Board, at times, to pass orders in a proceeding under section
397/398 of the Companies Act, 1956. In most of the cases, the Company Law Board
encourages the warring groups for an amicable settlement and in some cases, the
effort will be on convincing a group to buy another group and so that the
deadlock ends.
It would also be extremely
difficult for the Company Law Board to go through all the facts presented, the
counter statements, and the proceedings. Thus, except in simple cases, the
disposal of company petition under section 397/398 of the Companies Act, 1956
takes time. Again, an interim order passed by the Company Law Board under
section 397/398 of the Companies Act, 1956 is an appeallable order on some
grounds under section 10 (F) of the Act. Rather the final proceedings of the
Board in a petition under section 397/398 of the Companies Act, 1956, the
interim proceedings will often leads to much litigation. There is no bar on the
petitioners to present interim applications from time to time though the
interim applications were dismissed initially saying that there is no prima
facie case. Nothing prevents the Company Law Board to take any new facts
presented in the course of the proceeding and pass orders. There may be a
technical thing that if the petitioners want to plead any additional facts, the
main Company Petition should accordingly be amended. In my opinion, all these
technicalities can be ignored by the Company Law Board under section 397/398 of
the Companies Act, 1956. Technicalities are time consuming and in my opinion,
technicalities can be ignored in a proceeding under section 397/398 of the
Companies Act, 1956 to the extent possible.
Case Study:
Below is the extract of a
judgment rendered by the Calcutta High Court and it is a wonderful case for
consideration. In this case, some interim applications were dismissed by the
Company Law Board initially saying that there is no prima facie case.
Thereafter, the petitioner has also brought certain fresh details to the
knowledge of the Company Law Board and sought further interim orders. The CLB,
at the second instance, convinced of passing a detailed interim order or
directions and the same is challenged to the High Court and there the Appeal is
partly allowed. The main issue discussed in the following judgment is like:
“Can the Board allow interim
applications and give directions to the Respondents if the Board initially
rejects all the interim applications filed by the Petitioners under section 397/398
of Companies Act?”
The extract of the judgment
delivered by the Calcutta High Court on 16.09.2011, in ACO No. 71 of 2011,
between BIRLA CORPORATION LTD vs. BIRLA EDUCATION TRUST & ORS, is as
follows:
“6. The proceeding before me is
at the interim stage only and on behalf of the appellant, that is the company,
prayer has been made as an interim measure, for stay of operation of Paragraph
85(vi) of the order, pending final decision in the appeal. On behalf of the
appellant, it has been submitted that the transactions of the company under the
CBLO and MIBOR were all valid transactions. It has been argued that the CLB has
committed jurisdictional error in passing the order under Section 402 of the
Act, as the scope of interim order under Act is required to be passed in terms
of Section 403 of the Act only. The other ground on which I have been addressed
is that in the order passed on 9th February 2011 the CLB had come to a finding
that there was no prima facie case of mismanagement, and no subsequent event
had taken place which required the CLB to take a diametrically opposite stand
in C.A. No 302 of 2011. In this regard, the learned Counsel for the appellants
sought to attract the principle of res judicata.
7. On behalf of the respondent
no.7, supporting the appellants, it was contended that it was impermissible on
the part of the applicants to come with an interlocutory application with the
factual allegations at variance with the pleadings that form foundation of the
original complaint contained in the main company petition. The main case of the
respondent nos. 1 to 6 being the applicants before the CLB is that when the
company petition was filed, the notice for postal ballot seeking to drastically
alter the main business line of the company was not in existence, and the
annual report of the company containing the accounts for the year 2010-2011 was
also not available. It was contended that the applicants came to learn the
details of CBLO and MIBOR transactions subsequent to 9th February 2011. Further
submission on behalf of the respondents/applicants has been that these
subsequent acts on the part of the company formed part of a chain of activities
resulting in mismanagement of the affairs of the company which were oppressive
to the minority shareholders, and such subsequent facts could be brought to the
notice of the CLB by filing an interlocutory application in the subsisting
proceeding, and for each of these acts, filing of a fresh petition was not
necessary.
8. On the latter point, that is
whether a new petition was required to be filed or not, the CLB, in the last
paragraph of the order, i.e. paragraph 85(vii) has issued direction which is in
the nature of direction for amendment of the original company petition. On
behalf of the appellant, the legality of such a direction was questioned. But
that issue I propose to deal with at the stage of final hearing of the appeal.
In this order, I shall confine my scrutiny to the directions contained in
paragraph 85(vi) of the order impugned, by which investigation of the dealings
of the company to ascertain profits made through such dealings by the company
and Lodha Capital Markets Ltd., PLC Securities Pvt. Ltd. and others through
whom such transactions were done, has been directed by an outside audit firm,
Ernst & Young. The appellant has questioned the choice of the audit firm
also, on the ground that the said firm does audit work for several companies
belonging to different branches of the Birla Group, being the industrial house
having presence in several areas in the corporate sector of this country. This
issue was raised as there are several proceedings pending in different forums
in which the members or associates of the said family and the respondent no.7
are involved over a dispute relating to grant of probate of the will of
Priyamvada Devi Birla (since deceased), who had controlling interest in several
companies and other entities of a branch of Birla Group known as the M.P. Birla
group. The appellant company also belongs to the said M.P. group. Though in the
main company petition the authority or power of the respondent no.7 over the
estate of said Priyamvada Devi Birla, which includes 62.9% of the shareholding
of the appellant company has been questioned, before me at this stage arguments
have been primarily presented on behalf of the applicants as minority
shareholders having grievance over the acts of the majority, which they
consider oppressive and prejudicial to their interest, interest of the company
as also public interest.
9. As I have already discussed in
the earlier part of this order, there have been interlocutory proceedings in
the past among the same parties on the allegations of mismanagement and
oppression and plea for various interim reliefs was turned down by the CLB in
the order passed on 9th February, 2011. The instant application, i.e. C.A.
No.302 of 2011 was filed on the ground of occurrence of certain subsequent
events to which I have also referred to earlier in this order. So far as
proposal for alteration of the memorandum of association of the company is
concerned, if the resolution was carried through, that might have had resulted
in unalterable situation so far as the activities of the company is concerned,
and I shall test the legality of that issue at the stage of final hearing of
this proceeding. But the CLB has already directed not to give effect to the
said notice for postal ballot and stay of operation of that part of the order
has not been pressed before me at the interim stage by the appellant. If the
postal ballot notice is not given effect to, in the light of the earlier order
of the CLB and its observations made in the said order passed on 9th February
2011, can the order for audit investigation in the manner directed be
justified?
10. In my opinion, within such a
short span of time the Company Law Board ought not to have come to an
altogether different finding at the prima facie stage so far as it directed
investigation into the dealings of the company in the money market. In my
opinion, the events subsequent to 9th February 2011 would not have justified
formation of fresh opinion, even at prima facie level, requiring investigation
into the financial dealings of the company. Such financial transactions seemed
to be going on since 2008-09. Substantial argument was advanced on the legality
of the transactions conducted through CBLO and MIBOR. The other complaint made
was rapid frequency of the transactions in relation to the investments of the
funds of the company, which according to the applicants did not constitute
investments made by a company of its surplus funds in normal course, but
constituted trading in financial products. But the CLB has not come to any
finding that such transactions are impermissible or cannot be entered into by
the company on the ground that such dealings would constitute dealing in
financial products, at present not mandated by its memorandum of association.
As transactions of this nature had been going on when the earlier order was
passed by the CLB, in the absence of there being any fresh finding that these
transactions were illegal, I do not think, prima facie, an investigation by an
outside agency is warranted at this stage.
11. On behalf of the applicants,
it was submitted that the order passed on 9th February 2011 was not sustainable
in law and the observations and comments made in the said order ought not to be
given credence to by this Court. The appeal against that order has also been
assigned before me and I am hearing that appeal. I am not making any
observation in this order as regards the legality of the order passed on 9th
February 2011. But so far as the CLB is concerned, I do not think subsequent
facts justified directing investigation into the dealings of the company when
the Board itself had opined earlier that the applicants had not made out any
prima facie case.
12. It was brought to my notice
in course of hearing that the order passed by the CLB on 9th February 2011 and
17th June 2011 were by different members of the Board. But I do not think on a
subsisting set of facts the CLB ought to take different view through different
members in different interlocutory proceedings arising out of a single company
petition.
13. It was also submitted on
behalf of the applicants that such investigation would not in any way prejudice
the company. Mere fact that a particular direction would not prejudice a
company would not justify passing an order directing something to be done which
in normal course would not be permissible.”
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
