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
While the intention behind
providing preventive and some remedial measures under section 397/398 of
Companies Act, 1956 to the minority shareholders is good, the section is
misused at times causing enormous loss to the Company or the Majority
Shareholders. As everybody knows that section 397 provides relief to the
minority shareholders if there is oppression by the majority; and section 398
provides relief to the minority shareholders when there is mismanagement in the
Company. While, according to me, what constitutes ‘oppression’ and what
constitutes ‘mismanagement’ is subjective, both the sections are cited while
the minority seeks relief against the majority before the Company Law Board or
NCLT in future. Though, according to me, the Company Law Board can pass any
orders under section 397/398 of Companies Act, 1956 in order to put an end to
the matters complained of, even other sections of the Companies Act are cited
routinely and in most cases investigation into the affairs is also sought for.
Listed Public Companies normally do follow all the corporate requirements as it
is under scrutiny from SEBI and as the listed companies are bound to comply
with the listing agreement entered into with the relevant Stock Exchanges. In
India, many family companies or closely held companies do not follow the
requirements of the Companies Act, 1956 and it would very often be difficult
for an outsider to know as to the status of the Company or even it is difficult
for an adjudicating authority to find-out truth.
Many family companies or closely
held Private Companies are run upon mutual understanding and when understanding
among the shareholders gets shaken, it would possibly lead to litigation. If
these companies do not comply with the corporate requirements or the mandatory
requirements under the provisions of the Companies Act, 1956, then, it would be
difficult for the Company Law Board to ascertain the truth under section
397/398 of the Companies Act, 1956. In these matters, it would be very easy for
an applicant or a group of minority qualified under section 399 of the
Companies Act, 1956 to be able to make-out a prima facie based on concealments
and the Company Law Board may pass interim orders or may give interim
directions pending the disposal of the main Company Petition. Whether to grant
an ex-parte interim order or grant an interim relief after hearing the parties
concerned will depend upon the urgency cited and the style and understanding of
the presiding officer about the case before it.
But, depending upon the style of
the Presiding Officer, in my opinion, once the interim order or the relief is
granted, then, it will remain so until the final disposal of the Company
Petition. In my opinion and in view of the stakes involved in many company
disputes, when an ex-parte order is granted, then, the matter is again to be
heard fully when the opposite party makes an objection to the passing of the
ex-parte order.
It is true that it will be very
difficult for a presiding officer, according to me, to comprehend the entire case
within minutes and immediate understanding is possible only in few cases based
on the averments in the Company Petition. And, there can also be a practice to
entertain all Company Petitions under section 397/398 of the Companies Act,
1956 saying that all contentious issues can be looked into only during the
final disposal of the case. According to me, this is not correct and when there
is no prima facie case under section 397/398 of the Companies Act, 1956 upon
the bare perusal of the Company Petition, then, there should not be any interim
relief and such Company Petitions should be dismissed even without asking the
opposite party to file a Counter Statement. But, in practice, only when the
maintainability of the petition is questioned on the ground of qualification
under section 399, the matter would be looked into and even in this case
involving contentious issues like further issue and allegation of fraudulent
transfers, the Board would be left with no other option except to get all the
contentious matters decided finally and after hearing the version of the
opposite parties or the majority shareholders. But, when the majority comes-up
with a petition to dismiss the Company Petition under section 397/398 of the
Companies Act, 1956 on the ground that it lacks the basic required averments,
then, such pleas, according me, are not entertained. There can be no reason as
to why a Company Petition under section 397/398 of the Companies Act, 1956
should be pending when there is no prima facie case of ‘Oppression and
Mismanagement based on the averments in the Company Petition and the documents
filed. The case where the further enquiry is needed can be completely
different.
Emphasizing on the need of having
a prima facie case, the Hon’ble Calcutta High Court, in A.P. O. T. Nos. 355 of
2010, between AI Champdany Industries Limited & Others Vs. Blancatex A. G.
& Others (CDJ 2011 Cal HC 557), was pleased to observe as follows:
“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.”
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
