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 399 of
the Companies Act, 1956 entitles minority shareholders, subject to the
qualification prescribed, to approach the Company Law Board (CLB) under section
397/398 of the Companies Act, 1956 seeking relief against the ‘oppression and
mis-management’ from the majority shareholders in the Company. As majority
shareholders effectively controls the Board through their say in General Body
Meetings, the protection to the majority is not envisaged though even the
majority can approach the Company Law Board under section 397/398 of the
Companies Act, 1956 when they become artificial minority under certain
circumstances. There were several principles and precedents developed over the
time on the scope of section 397/398 of the Companies Act, 1956 and these
proceedings are seen as most complex usually. Though even the liquidation
proceedings exercised by the High Court are complex at times, the proceedings
under section 397/398 of the Companies Act, 1956 are really complex as the
Board would be exercising its power to ‘put an end to the matters complained
of’. Dealing with the scope of the provisions dealing with the ‘oppression and
mismanagement’ under Companies Act, 1956, the Hon’ble Bombay High Court in
Mauli Chand Sharma and another Vs. Union of India and others, (1977) 47 Com
Cases 92, has held that:
“chapter II of the Act, which
includes section 255, deals with corporate management of the company through
directors in normal circumstances, while Chapter VI, which contains sections
397, 398 and 402, deals with emergent situations or extraordinary circumstances
where the normal corporate management has failed and has run into oppression or
mismanagement and steps are required to be taken to prevent oppression and/or
mismanagement in the conduct of the affairs of the company. In the context of
this scheme having regard to the object that is sought to be achieved by
sections 397 and 398 read with sections 402, the powers of the court under can
not be read as subject to the provisions contained in the other chapters which
deal with normal corporate management of a company. Further, an analysis of the
sections contained in Chapter VI of the Act will also indicate that the powers
of the court under sections 397 and 398 read with section 402 can not be read as
being subject to the other provisions contained in sections dealing with usual
corporate management of a company in normal circumstances. The topic or
subjects dealt with by sections 397 and 398 are such that it becomes impossible
to read any such restriction or limitation on the powers of the court acting
under section 402. Without prejudice to the generality of the powers conferred
on the court under these sections, section 402 proceeds to indicate what types
of orders the court could pass. Under clause (a) of section 402, the court’s
order may provide for the regulation of the conduct of the company’s affairs in
future and under clause (g) the courts order may provide for any other matter
for which in the opinion of the court it is just and equitable that provision
should be made. An examination of the aforesaid sections brings out two
aspects; first, the very wide nature of the power conferred on the court, and
secondly, the object that is sought to be achieved by the exercise of such
power, with the result that the only limitation that could be impliedly read on
the exercise of the empower would be that nexus must exist between the order that may be passed
thereunder and the object sought to be achieved by those sections and beyond
this limitation which arises by necessary implication it is difficult to read
any other restriction or limitation on the exercise of the court’s power.
Further, section 397 and 398 are intended to avoid winding up of the company if
possible and keep it going while at the same time relieving in minority
shareholders from acts of oppression and mismanagement or preventing its
affairs being conducted in a manner prejudicial to public interest and, if that
be the objective, the court must have power to interfere with he normal corporate
management of the company, and to supplant the entire corporate management, or
rather, mismanagement, by resorting to non-corporate management which may take
the form of appointing an administrator or a special officer or a committee of
advisers, etc., who would be in charge of the company”.
If we keep the qualification
issue apart, it is long been settled that ‘an isolated incident’ can not entitle
the minority shareholders to approach the Board under section 397/398 of the
Act. There are several precedents on the issue though a lenient view is taken
now-a-days on the issue of ‘continuity of acts’. Even isolated incident in the
Company can lead to the intervention of the CLB under section 397/398 of the
Companies Act, 1956 depending on as to how the Board considers the effect of
that incident. It establishes a point that there can be issues between the
minority and majority which can be settled before any other forum like Civil
Court etc. without invoking the jurisdiction of Company Law Board under section
397/398. There can be an issue of enforcement of an agreement between two
groups in the Company and that dispute can be settled through a Civil Court or
by an Arbitrator if the agreement contains an Arbitration Clause. Thus, if the
disputes erupt between the groups in the Company, then, one group may file a
Criminal Complaint on the other group, may file a Civil Suit and even can ask
for an appointment of arbitrator to look into the disputes if the cause for the
dispute is with regard to the ‘enforcement of any specific agreement’.
Res-subjudice & Res-judicata:
The point is as to what is the
effect of pending or concluded legal proceedings to the proceedings under
section 397/398 of the Companies Act, 1956. Can the Board ignore the findings
of concluded proceedings? Can the Board give a different finding on the issue
concluded by other forum?. Can the Board ignore the pending legal proceedings
between the minority and majority? Etc. The issue of approaching two forums
with the same relief and seeking the same relief concluded by the competent
forum are dealt-with under section 10 and 11 of Civil Procedure Code, 1908 and
those are reproduced below without explanations.
“10. Stay of Suit – No court
shall proceed with the trial of any suit in which the matter in issue is also
directly and substantially in issue in a previously instituted suit between the
same parties, or between parties under whom they or any of them claim
litigating under the same title where such suit is pending in the same or any
other Court in India having jurisdiction to grant the relief claimed, or in any
court beyond the limits of India established or continued by the Central
Government and having like jurisdiction or before the Supreme Court.”
“11. Res Judicata – No court
shall try any suit or issue in which the matter directly or substantially in
issue has been directly or substantially is in issue in a former suit between
the same parties, or between the parties under whom they or any of them claim,
litigating under the same title, in a court competent to try such subsequent
suit or the suit in which such issue has been subsequently raised, and has been
heard and finally decided by such court.”
These two principles are so
important in a proceeding under section 397/398 of the Companies Act, 1956
though now-a-days it is rare to see a litigation pending in a Civil Court
between the minority shareholders and majority or the Company. Certain settled
legal principles like Res subjudice and Res judicata are to be followed by any
judicial authority or quasi-judicial authority as it is supported by sound
logic. This is similar to the ‘principle of natural justice’. However,
application of these principles to the proceedings under section 397/398 of the
Companies Act, 1956 are most complex and the Board exercises lot of discretion
in this regard making a balance between the settled legal principles and the
object of section 397/398.
Simultaneous jurisdiction:
Explaining a to how the
shareholders are entitled to approach Civil Court or Arbitrator at times and as
to how the CLB too has power to look into the issue, the Court in CDS Financial
Services (Mauritius) Limited Vs. BPL Communications Limited and others, (2004)
121 Comp Cases 375, has held that:
“when there is no express
provision excluding the jurisdiction of the civil courts, such exclusion can be
implied only in cases where a right itself is created and the machinery of
enforcement of such right is also provided by the statute. If the right is
traceable to the general law of contracts or it is a common law right, it can
be enforced through the civil court, even though the forum under the statute
also will have jurisdiction to enforce that right. Sections 397, 398 and 408 of
the Companies Act, 1956, do not confer exclusive jurisdiction on the company
court to grant reliefs against oppression and mismanagement. The scope of these
sections is to provide a convenient remedy for minority shareholders under
certain conditions and the provisions therein are not intended to exclude all
other remedies”.
Possible misuse:
With the simultaneous jurisdiction
and shareholders having a scope to approach Civil Court or Arbitrator and also
approach CLB at times, there is a possibility for converting the jurisdiction
of CLB under section 397/398 to that of a Civil Court. It is very much possible
as even isolated incidents are considered under section 397/398 of the
Companies Act, 1956 though it depends upon as to how the CLB views it. Though it was a case of exercise of powers by
Company Court, dealing with the similar issue, the Court in B.Ramachandra
Adityan Vs. Educational Trustee Co. (P) Ltd and another, (2003) 5 Comp LJ 413
(Mad), has held that:
“It is, no doubt, true that the
scope of the civil suit is different as the proposed suit is one under the
general law and the scope of the company petition is different. But, it will
not be open to convert the proceedings in the company Court, which are summary
in nature and to use the finding arrived at in the summary proceeding, if it is
favourable to the petitioner, in the civil proceeding. It is in the sense that
the proceedings under the company law are an abuse of the process of the court
and it is well settled that the proceeding herein can not be used for some
oblique or some extraneous purpose”.
Striking a balance:
Dealing with the issue, the
Company Law Board in RDF Power Projects Ltd. and others Vs. M.Murali Krishna
and others, (2005) 4 Comp LJ 97 (CLB), has held that:
“the object of section 10 of the Code of Civil
Procedure 1908, is to avoid conflicting decisions of two competent courts over
the same matter and save the time of the court, where the subsequent
proceedings are initiated in the same matter. By virtue of section 10, a court
shall not proceed with the trail of a suit in which the matter is directly and
substantially the same as the one in issue in a previously instituted pending
between the same parties or parties under whom they claim to litigate under the
same title. The following are essential conditions for application of the
provisions of section 10:
(a) There must be two pending suits on the same
matter.
(b) These suits must be between the same parties
or parties under whom they or any of them claim to litigate under the same
title.
(c) The matter in issue must be directly and
substantially the same in both the suits.
(d) The suits must be pending before the
competent court or courts.”
Further, the Board has observed
that “in the light of the provisions of section 10, the subject matter involved
both in the Civil Court and the Company Law Board must be examined”. Further,
the Board went on observing that “a careful analysis of the issues both before
the Civil Court and the Company Law Board would indicate that the whole of the
subject matter in these proceedings is not identical. Section 10 is not
attracted if one or some of the issues are in common as held by the courts in a
number of decisions. The entire subject-matter of the company petition is not
covered by the previously instituted suit. It is free from doubt that there is
no substantial identity of the subject-matter before the Civil Court and the
Company Law Board. The only issue before the Civil Court is in regard to the
right of the second applicant to continue in the office of the managing
director of the company. As a result the petitioners shall not interfere in the
functioning of the company. Thus, none of the other contentious issues raised
in the company petition is before the Civil Court. Therefore, the decision of
the Civil Court will not definitely affect the decision in the present company
petition, save the continuance of second applicant as the managing director, in
which case it can not be said that the matter in issue is directly and
substantially is the same in both the proceedings. Section 10 would only apply,
in my view, where the decision in previous suit will definitely affect the
decision in the later proceedings. Moreover, sections 397 and 398 provide
adequate relief to the aggrieved members on account of the possible oppression
by the majority and a Civil Court can not usurp the powers of a Company Court,
whose jurisdiction brings from an enactment of Parliament and adjudge common
law rights on a prior consideration”.
Conclusion:
1. The CLB can certainly look into the
concluded proceedings, but, can not give a different finding on the same issue
concluded by a Competent Court.
2. The Petitioners approaching the CLB can
refer to the concluded proceedings; however, the petitioners may not be able to
get a relief with the similar or same grievances raised in the concluded
proceedings.
3. Irrespective of pendency of any
proceedings between the majority and the minority, the CLB can entertain a
petition under section 397/398 of the Act and the CLB will take an appropriate
decision as to the issue of grant of relief or the maintainability of a
petition under those circumstances.
4. When it comes to the issue of
applicability of settled legal principles like Res Judicata or Res Judice, the
CLB will exercise its discretion based on the facts of the case and no hard and
fast rule can be laid in this regard.
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
