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Sec 397 and sec 398 of companies act

Vinay (Articled Assistant) (198 Points)

12 July 2012

Can any1 explain the salient features of sec 397 and 398 of companies act?

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(Guest)

Dear Vinay,

Following are the features of Section 397 & Section 398 of the Companies Act, 1956 :

Section 397 : Application to CLT for relief in cases of oppression:

1. Any member of a company who complain that the affairs of the company are being conducted in manner oppressive to any member, may apply to the Company Law Tribunal (CLT) for an order under this section, provided such members have a right so to apply in virtue of section 399.

2. If, on any application, the Court is of opinion that the company’s affairs are being conducted in a manner oppressive to any member, the CLT may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

3. The law has not defined what is ‘oppression’ for purposes of section 397 and it is left to Courts to decide on the facts of each case whether there is such oppression. (Shanti Prasad Jain v. Kalinga Tubes Ltd., 1965 (35) Comp. Cas. 351: 1965 (1) Com LJ 193: AIR 1965 SC 1535).

4. The conduct of the majority shareholders should not only be oppressive to the minority but must also be burdensome, harsh and wrongful and continuing up to the date of petition (Shanti Prasad Jain v. Kalinga Tubes Ltd., 1965 (35) Comp. Cas. 351: 1965 (1) Com LJ 193: AIR 1965 SC 1535).

Section 398. Application to CLT for relief in cases of mismanagement:

1. Any member; of a company who complain that the affairs of the company are being conducted in a manner prejudicial to interest of the company or that a material change (whether by an alteration in its Board of directors, or manager or in the ownership of the company’s shares, or in any other manner whatsoever ) has been made in the management of the company, which is not in the interest of any creditors, debenture holders, or any class of shareholders; may apply to the CLT for an order under this section, provided such members have a right so to apply in virtue of Section 399.

2. If, on any application, the CLT is of opinion that the affairs of the company are being conducted as aforesaid, it may, with a view to bringing to an end of matters complained of, make such order as it thinks fit.

3. Section 398 comes into play when there is actual mismanagement of the affairs of the company. It may be contrasted with section 397 which deals with oppression to the minority shareholders, whether there is prejudice to the company or not. (Shanti Prasad v. Kalinga Tubes Ltd., 1965 (35) Comp. Cas. 351: 1965 (1) Com LJ 193: AIR 1965 SC 1535)

Regards,

Veeral Gandhi

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