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
Though, section 397/398 of the Companies Act, 1956 is basically meant to
protect the rights of the minority shareholders in the Company against the
oppression and mismanagement by the majority, the rights of the third parties
can not be ignored. The Company Law Board can pass any order under section
397/398 of the Companies Act, 1956 and under section 402 of the Act in order to
put an end to the matters complained of or in order to regulate the affairs of
the Company. Than oppression through further issue of share capital intended to
reduce the shareholding of one group, the acts of mismanagement are seriously
agitated by the shareholders before the Company Law Board in a petition under
section 397/398 of the Companies Act, 1956. In the course of dealing with
various issues between or among the shareholders or in the Company, the Company
Law Board may have to deal with many issues and the order of the Board, may at
times, affect the rights of the third parties. There can be an agreement
between the Company and the outsider and the validity of such an agreement may
be questioned in a petition under section 397/398 of the Companies Act, 1956.
The workmen can be heard by the Board at times in a petition under section
397/398 of the Companies Act, 1956. Based on the principles of natural justice
and in view of the complications, section 405 of the Companies Act, 1956
provides a right to any person to make an application to the Board asking for
permission to state his case in a petition under section 397/398 of the
Companies Act, 1956. Again, section 402 (e) and (f) dealing with the issue of
termination, setting-aside and modification of agreements between the Company
and the third parties emphasize the principles of natural justice. Thus, though
section 397/398 of the Companies Act, 1956 is seen as a dispute among
shareholders basically, the role of the third parties and the extent thereon is
important and complicated issue to deal with.
The right of the third party to participate in a proceeding under section
397/398 of the Companies Act, 1956 can never be construed that a third party
has a right to seek a relief of his own and get his issues settled. A third
party can express his views or stand on the issue connected in a proceeding
under section 397/398 of the Companies Act, 1956 and he may at times; get
benefited eventually when the Company Law Board passes a final order. Though it
is very complicated to list-out the powers of the Company Law Board under
section 397/398 of the Companies Act, 1956, it depends upon the facts and
circumstances of the case and if there is no specific bar on passing an order,
then, the Company Law Board can pass any order in order to put an end to the
matters complained of or in order to regulate the affairs of the Company.
Dealing with the issue as to whether a third party dues can be settled under
section 397/398 of the Companies Act, 1956, the Hon’ble High Court of Madras in
T. P. Sokkalal Ram Sait Factory Private Limited, In Re Prabhakaran and Others
Vs. T. P. S. H. Selva Saroja and Others (1978 (113) ITR 625, 1978 (48) CC 503,
1988 (113) ITR 625), was pleased to observe as follows:
“Section 397 of the Companies Act, 1956, enables an application being
made by a member of a company, if the affairs of the company were being
conducted in a manner oppressive to such member or members. Section 398 of the
Act provides for an application being made to the court if any member of the
company complains of mismanagement of the affairs of a company. The power of
the court to pass orders on such application is indicated in section 402 of the
Act. Clauses (a) to (f) of the said provision do not apply here on their
language. This position was not disputed. Reliance is placed on the opening
words f the provision, viz., "without prejudice to the generality of the
powers of the court" and also on clause (g) of the said provision which
contemplates the court providing for any other matter in its order for which it
was just and equitable that provision should be made. The clauses (a) to (f) of
section 402 of the Act, if analysed, would show that the directions are with
reference to the administration and management of the affairs of the company.
It does not contemplate directions regarding debts due to third parties. If the
applicant is right, then the company court would be the forum for settling
disputes about ordinary debts which would ordinarily have to be done in civil
suits on payment of appropriate court fees. This is not the object of the
provision. Clause (g) of the said provision is only a residuary one and has to
be construed in the light of the object with which section 402 has been
enacted, viz., to give directions regarding the internal management of the
company. Section 402 of the Act, cannot, in my opinion, be utilised for the
purpose of agitating the disputes about liabilities or for staying the tax
liability of the company. If there are any objections to the tax as levied,
then such an objection has to be got raised by recourse to the provisions of
the Income-tax Act. Section 397 and 398 of the Companies Act are for relieving
the shareholder against the oppression or mismanagement of the arrears of the
company. The liability to tax levied on the company is out-side the scope of
these provisions. Section 402 of the Act cannot, therefore, be invoked or
applied in such a case.”
On another interesting issue of impleadment of parties under section 405
and section 402 and the object behind the impleadment of third parties or the
rights of third parties to be heard, in a recent judgment, the Hon’ble High
Court of Bombay, in Company Appeal No.51 of 2009 between Ravi Kiran Agarwal
& Others Vs. Moolchand Shah S/o Mr. (Late) Sampat Raj & Others, was
pleased to observe as follows:
“13. Section 405 of the Act, deals with the power of the Company Law
Board to implead additional Respondents to an application under Sections 397 or
398. Under section 405, if the Managing Director or any Director or a Manager
of a company or any other person, has not been impleaded and such person
applies to be added as a Respondent, the Company Law Board is empowered to pass
an order added him as Respondent, if sufficient cause for doing so is
established to the satisfaction of the Board. The Company Law Board in the
present case inferred that the power to add or implead a party as a Respondent
to an Application under Sections 397 or 398 is to add only those parties who
are referred to in clause (d) and (e) of section 402. The Board applied the
interpretative tool of ejusdem generis. The principle of ejusdem generis would
have no application, where the Court is required to construe, two separate
statutory provisions which operate in different fields. Section 402 illustrates
the powers which can be exercised by the Company Law Board on an Application
under Sections 397 and 398. Section 402 is not an exhaustive catalogue of the
powers of the Board. Section 405 deals with the addition of parties. There is
no reason on justification for confining the words “any other person” under
Section 405 to those categories of persons who are elucidated in clause (e) of
the Section 402. As a matter of first principle, it would be impermissible to
do so. On an Application under Sections 397 and 398 the Board has, as already
noted earlier, wide powers to pass orders as it thinks fit to bring to an end
the matters of complained of and, under section 398(2), to even prevent the matters
complained of or apprehended. The exercise of those wide powers, may in a given
situation affect the interest of third parties. To hold that a third party
liable to be affected by an order under section 397 and 398, would not be
entitled to be heard on the ground that, it does not fall within the
description of ‘a person’ in clause (e) of section 402 who has an agreement
with the company would be fundamentally violative of the basic postulate of
natural justice. Nothing, except a clear statutory provision to that effect
should lead the court to adopt such a construction. If Parliament intended to
contemplate the addition of only those persons who had Agreements with the
Company, there was nothing to prevent the addition of those words. The words
“any other person” in Section 405 are not restricted by a stipulation that such
person must have an Agreement with the Company. Hence, the words “any other
person” must be given their plain and natural meaning so as to include any
person whose interest would be affected by an order that is sought in the
application under section 397 and 398. The Board misapplied the principle of
ejusdem generis. The principle of ejusdem generis is that when particular words
pertaining to a class category or genus are followed by general words, the
general words are construed as limited to things of the same kind as those
specified. The rule applies when i) The Statute contends an enumeration of
specific words; ii) The subject of enumeration constitutes a class or category;
iii) The class or category is not exhausted by the enumeration; iv) General
terms follow upon the enumeration; and v) there is no indication of a different
legislative intent. [G.P.Singh on the Principles of Statue Interpretation, 9th
Edition page 420.] This principle can have no application in construing word
“any other person” in section 405 which operates in a field untrammeled by
section 402.
14. The Company Law Board has in the present case diluted its finding
that the expression “any other person” under section 405 must be construed with
reference to section 402(e) by holding that occasions may arise to implead
other persons on the facts of each case. The Board noted that shareholders who
are not parties may apply on the apprehension that, any relief granted would
affect their interest or employees or creditors may also apply on the same
ground. The Board held that notwithstanding the ‘strict’ provisions of section
405, it may have to use it discretion in deciding on the basis of the facts of
each case, where the application for impleadment has shown sufficient cause to
be impleaded as a Respondent. The residual discretion which the Board assumes
to it, would itself indicate that the provisions of Section 405 cannot be
construed in the manner in which they were construed in the earlier part of the
judgment. The interpretation that has been placed by the Board on the
provisions of section 405 is erroneous and has to be disapproved. The power of
the Board under section 405 to implead any other person, is a wide power which
is conditioned, only by the satisfaction of the Board, that there is sufficient
cause for doing so. Where the relief that is sought in the application under
Sections 397 or 398 is liable to affect the interest of a third party, an order
of impleadment would be warranted. The impleadment of the party may be
considered necessary, or in the facts of a case, proper in order to enable the
Board to render a full, final and complete adjudication of the dispute. By its
very nature, the power cannot be restricted to predefined categories and must
be exercised in order to advance the underlying purpose and object of the
provisions of Sections 397 and 398.”
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
