Brief:
As everybody knows, section 397/398 of the Companies Act, 1956 provides a relief to the shareholders of a Company if they are qualified to approach the Company Law Board under section 399. The object of sections 397/398 is to provide protection to the minority shareholders in a Company against the oppressive and the acts of mismanagement by the majority. I personally feel that an application under section 397/398 of the Companies Act, 1956 is a serious thing exposing serious misunderstandings between majority and minority group in the Company. We see this groupism in private limited companies and closely held public companies too at times.
Majority rule:
It is true that there should be proper protection to the interests of every shareholder in a Company or the minority. Obviously, majority rule prevails under Company Law with certain restrictions or limitations. While the majority is allowed to go ahead with their decisions for the overall benefit of the Company, the majority is not supposed to oppress the minority or mismanage the Companies property.
The relief:
When there is oppression or mismanagement in the Company, despite other remedies, the most preferred remedy is to approach the Company Law Board under section 397/398 of the Companies Act, 1956. The Company Law Board, with certain express limitations, exercises all powers in orders to set the things in the Company right and to prevent the acts of oppression and mismanagement.
In view of the complications and the stakes, a shareholder or a petitioner in a petition under section 397/398 of the Companies Act, 1956, seeks immediate relief. However, the established procedure and legal principles can not be overlooked. It is true that there should be an effective remedy to the shareholders or the minority shareholders when they approach the Company Law Board showing oppression and mismanagement in the Company. But, inevitably, there are many technical things in the course of proceedings before the Board.
Procedural technicalities – bringing subsequent events to the knowledge of the Board:
The difficult thing, as I see, is bringing the subsequent events to the knowledge of the Board and pressing for orders based on the subsequent things. Here the reference to subsequent things is to be seen as events subsequent to the filing of petition before the Board under section 397/398 of the Companies Act, 1956. It is very important and complicated procedural issue before the Company Law Board now and it will be complicated inevitably even before the proposed National Company Law Tribunal.
What happens now is that, if the Petitioner wants to bring some subsequent events to the knowledge of the Board, then, he should amend the main company petition and it is burdensome exercise in most cases. In many cases, the oppression and mismanagement continues even after the presenting a petition under section 397/398 of the Companies Act, 1956 to the Board. In such a case, the petitioner or the minority should take lot of effort to bring all the subsequent events to the knowledge of the Board and he may even prefer to question all the subsequent events. At present, the procedure followed to bring the subsequent events to the knowledge of the Board is to seek amendment of the main Company Petition. It’s a difficult exercise as I believe and we need to make these things simpler.
Few precedents:
The Calcutta High Court, in Mohta Bros.(P) Ltd. and others Vs. Calcutta Landing and Shipping Co. Ltd. and others,(1970) 40 Com Cases 119, was pleased to observe that “when dealing with a petition for relief from oppression or mismanagement under sections 397 and 398 of the Companies Act, 1956, the court must confine itself to the case as made out in the petition and to the allegations made therein and the supporting affidavits and not look at other evidence with regard to events that might have happened subsequent to the petition”.
The Company Law Board, in Karedla Suryanarayan and othes Vs. Sri ram Dass Motor Transport (P) Ltd. and others (1998) 1 Com LJ 342 (CLB), was pleased to observe that “ section 397/398 petition has to stand on its own on the basis of the allegations contained in the petition. Subsequent events brought on record alone, in case the main petition fails on merits, can not entitle a person to any relief. In case, the allegations in the main petition are proved, then the subsequent events may be taken into consideration by the Company Law Board in moulding suitable reliefs. Since, on most of the occasions, when subsequent events are sought to be brought on record either through an amendment to the main petition or though an application, certain interim reliefs are also sought for, as happened in this application. Since in such cases, the main petition itself would be pending and that there would have been no occasion for us to find out whether the petitioners have made out a case for grant of relief thereof, any interim relief prayed for in such applications containing subsequent events could only be related to maintenance of status quo in regard to the affairs of the company. No relief which would upset the status quo can be granted when the allegations in the main petition are yet to be assessed by the Company Law Board. Thus, on the issue of subsequent events, it is held that there is no bar in subsequent events being brought on record and being considered by the Company Law Board also, but such consideration would be only to mould the relief to be granted in case the petitioner succeeds in the main petition and that any interim relief granted, based on subsequent events, would be limited to status quo being maintained in regard to the affairs of the company”.
The High Court of Bombay, in Jer Rutton Kavasmaneck and others Vs. Gharda Chemicals Ltd. and others, (2001) 106 Com Cases 24, was pleased to observe that “in a petition for relief under section 397 of the Companies Act, 1956, it is permissible to bring on record by amendment not only the facts pertaining to the events up to the filing of the petition but also subsequent events. Once the court comes to the conclusion that the petition is maintainable then subsequent events can also be considered in order to do complete justice between the parties and to make appropriate orders for removing the oppression”. On the same lines, the Calcutta High Court, in Promode Kumar Mittal and Others Vs. Southern Steel Ltd. and others, (1980) 50 Com Cases 555, expressed a view that “the court is to take notice of all the subsequent events to grant reliefs finally after trial in a company matter, and the interim orders passed from time to time by the court in all applications, the meetings held under the chairman appointed by the court, and the resolutions passed by majority shareholders and directors present therein are all relevant”.
The reading of the findings of the Courts as extracted above makes it very clear that the issue of bringing subsequent events to the knowledge of the Company Law Board under section 397/398 of the Companies Act, 1956, is interesting and also complicated.
Conclusion:
These are the practical difficulties a petitioner be facing before the Company Law Board under section 397/398 of the Companies Act, 1956 and these issues to be addressed properly and there is a need to make the relief under section 397/398 of the Companies Act, 1956 be truly effective.
Note:
I have expressed my personal view based on my experience and I am aware of the vastness of the subject.
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