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
Once the new Companies Act is
enacted, companies are supposed to be more vigilant in complying with the
corporate regulations and they may have to very often face litigation by the
creditors and members before the National Company Law Tribunal. As per the
clauses in the new Companies Bill, 2010, the National Company Law Tribunal can
entertain applications from any member/s and creditor/s to order investigation
into the affairs of the Company. On the same footing, the National Company Law
Tribunal can entertain applications raising the issues of oppression and
mismanagement even if the members are not holding a qualified percentage of
shareholding to file the application. Now, under section 399 of the Companies
Act, 1956, members holding 10% shares or any hundred members can file an
application under section 397/398 of Companies Act, 1956 and the Company Law
Board can pass any orders under section 397/398 of the Companies Act, 1956 in
order to put an end to the matters complained of or in order to regulate the
affairs of the Company. Once the new Companies Act comes into existence, then,
even the members holding only 5% shares can file an application under section
397/398 of the Companies Act, 1956 along with an application asking for
exemption from holding the requisite percentage of shares to seek relief on the
ground of oppression and mismanagement. However, when it comes to creditor or
creditors right to get a relief against the Company directly without
investigation, due care is taken in the Act and the National Company Law
Tribunal can only pass certain specific orders like restraining to act based on
the resolution etc.
Even now, some complain that the
provisions of oppression and mismanagement are getting misused and a frivolous
litigation is often filed creating enormous problems to the Company or the
majority shareholders in the Company. We all know the legal position under
section 397/398 of the Companies Act, 1956 and the changes from to time. The
changes in the legal position under section 397/398 of the Companies Act, 1956
are as follows:
Initially, the members are
supposed to establish a strict case against the Company for getting relief. It
is also known that the oppression alleged should be ‘harsh and burdensome etc.’
According to me, earlier, the
interpretation of section 397/398 of the Companies Act, 1956 was infavour of
the majority shareholders in the Company and technicalities were often get
emphasized. There are findings that the disputed facts can not be decided by
CLB, there is a proposition with regard to ‘consent’ under section 399 and
there is so much emphasis on the issue of ‘continuity of the alleged acts’ and
also limitations on the powers of CLB has also been frequently highlighted.
Now, there is no much emphasis on
technicalities under section 397/398 of the Companies Act, 1956 and the
majority is asked to reply to the allegations in the Petition even if the
majority feels that there is nothing in the Petition and it is motivated one.
When it comes to appeal against
the CLB’s order under section 10 (F) of Companies Act, 1956, in the past, much
emphasis was laid on ‘substantial question of law’.
Now, it is settled that
perversity becomes the ‘question of law’ and as such if the order passed by the
Company Law Board under section 397/398 of the Companies Act, 1956 is contrary
to facts or misinterpretation of law to the facts, then, appeal is very much
maintainable under section 10 (F).
There are two views when it comes
to interfering with the functioning or internal management of the Company.
There is a view that nothing happens if liberal interpretation is placed by the
adjudicating authority and if the majority in the Company or the Company is
asked to supply the demanded information or the copies of the documents. There
is another view that the Company maintains secrecy in view of its business
interests or in the interests of the shareholders and as such, there should be
a strong prima facie case against the Company or the majority in the Company
while passing any interim relief under section 397/398 of Companies Act, 1956.
These different views on interpreting section 397/398 of the Companies Act,
1956 continues to be there and it will also be continued even after the new
Companies Act is enacted.
What normally now happens is that
the CLB may easily entertain an application under section 397/398 of the
Companies Act, 1956 and without going into the merits of the case, the CLB may
ask the majority to supply the information sought by the minority shareholders
or the applicants under section 397/398 of the Companies Act, 1956. Not
agreeing with such proceeding and liberal process under section 397/398 of the
Companies Act, 1956, the Calcutta High Court in AI Champdany Industries Limited
& Others Versus Blancatex A. G. & Others, CDJ 2011 Cal HC 557, was
pleased to observe as follows:
“Regulation 24 of the said
regulations provide the powers to the board to order production of documents,
as enumerated above. The qualification for filing an application under Section
397 and 398 of the Act is one tenth of the number of shareholders or 100
members whichever are less or by shareholders representing not less than one
tenth of the issued share capital of the company provided that the applicants
have paid the entire call amount. (See Section 399 of the Act). Therefore, a small
minority of the shareholders of the company can file an application under those
sections. Just because such a minority files such an application, does it
follow that the company should provide inspection of their documents and
provide copies to them, which they were otherwise not entitled to do under the
other provisions of the Act and the Code of Civil Procedure and Evidence Act
discussed above? Should the Company Law Board upon mere filing of an
application exercise its power under regulation 24 asking the company to
disclose the documents and provide copies to the applicants?
It is true, that when such an
application is decided and is being heard it assumes the character of a
proceeding in rem where creditors contributors, the government, the other
statutory authorities may become involved. When the proceedings under these sections
become open to the world, the affairs of the company are also open to view by
the world and the Company Law Board has to pass orders accordingly. At what
point of time, does the Company Law Board proceed to pass orders in the nature
of those which are prayed for in this application? Our appeal court in Maharani
Lalita Rajya Lakshmi M.P. – v – Indian Motor Co. (Hazaribagh) Ltd. and others,
reported in AIR 1962 Calcutta 127 cited by Mr. S. B. Mookerjee, learned Sr.
Advocate said that refusal to give access to or inspection of the books of
account of the company was not oppression as a shareholder had no such right.
Allowing such inspection, would, according to the court, be asking the
directors to do something they were not obliged to do in law and granting
something to the shareholders which they were not obliged to receive. That
exposition of law is, in my opinion, very relevant to adjudge whether a company
can be compelled to disclose the documents asked for in this case. A case
before the Division Bench of the Delhi High Court in Rajdhani Roller Flour
Mills Pvt. Ltd. – v – Mangilal Bagri and others, reported in 70 Company Cases,
page 788, was cited by Mr. Sudipto Sarkar, learned Sr. Advocate. From the facts
narrated in the decision, inspection of documents at the time of witness
examination was in issue. In that context and rightly so the court said:
“The Calcutta case, in our
opinion, would not apply in the given situation and we express our disagreement
with the view that the right of inspection is limited to the board of directors
under section 209(iv) and that right is not available to shareholders for
inspection of the books of account of the company in the course of proceedings
under sections 397 and 398 of the Act.”
Rightly so, because when a Section
397 and 398 proceeding is admitted and heard by examination of witnesses, it
becomes a proceeding in rem, as I have said before. Once the proceedings
partake of that character the court or the Company Law Board, after satisfying
itself that there is a prima facie case can direct the company or persons in
control of it to produce documents mentioned in regulation 24 of the Company
Law Board Regulation 1991. It should do so only upon such conviction, because
the qualification to file this kind of an application is 10% of the
shareholders or 100 members whichever is less and shareholders having 10% of
the value of shareholding. Then in that case each and every minority group of
shareholders can by filing an application under Section 397, 398 compel the company
to disclose its affairs to them, contrary to the other provisions of the
Companies Act. Such order in my opinion can only be passed after the prima
facie case is established. If the prima-facie case is not established then the
principles in the case of Maharani Lalita Rajya Lakshmi M.P. – v – Indian Motor
Co. (Hazaribagh) Ltd. and others, reported in AIR 1962 Calcutta 127 have to be
followed. Furthermore, in my opinion, no such prima facie case was established
by the applicants to warrant passing of an order for disclosure of some very
secret internal documents of the company.
The following findings of the
Company Law Board in its order dated 17th May, 2010 are reproduced herein
below:
“14. On the submissions of either
side, this Bench decided these applications as follows:
Though the respondents relied
upon Mahatab Brothers case and Maharani Lalitha Rajalaxmi case to state that
the shareholders are not entitled to the inspection of the documents, whereas
the Hon’ble Delhi High Court, Division Bench, in Rajdhani Roller Flour Mills
Pt. Ltd. – vs – Mangilal Bagri and ors. – Delhi High Court – DB (1991) 70
Company Cases Page no. 788, held that whenever any member or members filed
petition under Sections 397 & 398 of the Act setting out the facts showing
prejudice towards either the share holders or the company, they are entitled to
inspect the documents relevant to the material facts mentioned in the petition
because the documents are necessary to decide as to whether oppression and
mismanagement is there or not. Here, in this case, the petitioners specifically
stated that the R – 3 i.e. the director of R – 1 Company is none other than the
brother of one of the directors of R-5 Company i.e. Jayanta Pujara, it being
not disputed by the respondents, it can not be decided at this juncture whether
the dealing done is at arms length distance or not unless and until the
documents relevant to the dealings are looked into. Thereby the citations
relied upon by the respondents are not applicable to the present case. As per
Section 300 of the Companies Act, if any director is directly or indirectly
interested in the contract or arrangement or dealings of the Company, his
presence shall not be counted for the purpose of forming of quorum at the time
of any such discussion, and if he `does vote, his vote shall be void. Indeed
the director who knowingly contravene the provisions of this section shall be
punishable as well, it being the position, R-3 having not disputed that he is
brother of Jayanta Pujara who is one of the directors of R-5 Company, for time
being it cannot be assumed that the dealing with R - 5 is at arms length
distance. It is also requisite to see the documents concerned as to whether he
participated in the resolution passed or contracts entered with R-5 Company.
Likewise, it being said that the brother of R-3 is a director of ABLICO Company
(UK), the same analogy is applicable in this aspect as well. In this scenario,
it can not be said that the disclosure sought by the petitioners is not
relevant and it also cannot be said that the disclosure is to collect evidence
in favour of one party as long as there is cloud of oppression and
mismanagement subsisting by the acts of the directors who were cited as
respondents 2 & 3, hence, those material facts are very much required for
adjudication of this case. Having the petitioners herein asked for inspection
over number of documents, this Bench is of the opinion that some of these
documents are not required”.
These findings do not show that
any prima facie case under Section 397 and 398 has been appreciated by the
Company Law Board. The Board, in my opinion, has adopted a wrong approach. The
Board was required to see whether the existing pleadings and materials
disclosed any prima facie case. In this type of an application, prima facie
case means a case, which on the available evidence, has a reasonable likelihood
of success at the trial. If such a case was established then it would have been
proper, to exercise its powers under the law, to order disclosure of documents.
The approach taken by the Board was that the prima facie case was to be
established by ordering disclosure of documents, which was erroneous. I make it
absolutely plain that the prima facie case to be determined is the prima facie
case in the Section 397, section 398 proceedings. Such case has to be
determined after filing of affidavits therein, on the available evidence. The
appellants, Blancatex and Aldgate have not filed their reply. Their reply is to
be filed within two weeks from date. Moreover, I pass this order assuming that
the reasons given subsequent to releasing the operative part of the order dated
17th May, 2010 are reasons in support of the order. In this case, there is no
point sending back the matter to the Company Law Board, as I had done in the
earlier case because the reasons supplied later are also not adequate.
Therefore, for mere absence of reasons there is no point in sending the matter
back. But, the matter has to be sent back to the Tribunal, for the said
reasons, for appreciating the prima facie case of the parties upon giving them
a fresh hearing and to consider passing an order for disclosure of documents in
the light of the observations made above.”
Discussion on proposed ‘Class
Action’:
The proposed provision for class
action litigation against the Companies in the new Companies Act is similar to
‘Public Interest Litigation’ or the class action litigation filed under
Consumer Protection Laws. I am sure that there can be lot of litigation before
the National Company Law Tribunal under the new Companies Act and especially
there will be so much litigation asking for investigation into the affairs of
the Company and also there will be definite rise in the applications seeking
relief against the majority shareholders in the Company. Under the Companies
Act, 1956, there was something wrong in the Company, the Central Government can
be approached and they are supposed to deal with the illegality or the
irregularity. What happens now with the new Companies Act is that the creditor or
the members need not approach the Central Government in most the cases and
these interested people can approach National Company Law Tribunal easily
asking for investigation into the affairs of the Company or asking for relief
against the Company subject to the express limitations.
While it is good to keep the
companies under check and to make the companies to strictly comply with the
corporate regulations, we must also be vigilant at the frivolous litigation and
habitual litigants whose job is to litigate and to trouble their opponents. We
can find so much habitual litigants now and as such, the National Company Law
Tribunal may have to be very careful in dealing with this ‘Class Actions’. I am
sure that there will be lot of discussion on this subject by the Constitutional
Courts in the course. The ‘Class Action’ against listed Public Companies will
definitely be on rise under the new Companies Act as many feel not satisfied
with the functioning of SEBI and everyone knows the difficulties in approaching
SEBI raising investor grievances and questioning the malpractices in any listed
Company.
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
