| I have been continuously writing on issues touching | | | | the knowledge of all the shareholders including the |
| the corporate world and sharing my personal | | | | minority. |
| experience and views with the readers, my | | | | Issue: The issue for consideration is that as to |
| colleagues and people connected to the corporate | | | | whether the minority group can take advantage of |
| world. While there are many legal issues and the law | | | | the irregularities in the Company and which were with |
| touching the corporate world and functioning of | | | | the knowledge of the minority all along? |
| companies in India, I have written considerably on | | | | Analysis: |
| sections 397/398 of the Companies Act, 1956. I was | | | | Dealing with the object of the chapter laudably, the |
| always of the opinion that the listed public companies | | | | High Court of Bombay, in Mauli Chand Sharma and |
| are well regulated to a great extent. SEBI has a | | | | another Vs. Union of India and others, (1977) 47 Com |
| considerable role in regulating the capital markets and | | | | Cases 92, was pleased to observe that" chapter II |
| no listed public company dare to ignore the | | | | of the Act, which includes section 255, deals with |
| commitments under listing agreement entered into | | | | corporate management of the company through |
| with the stock exchanges. Despite well regulated | | | | directors in normal circumstances, while Chapter VI, |
| set-up to regulate the capital markets and the listed | | | | which contains sections 397, 398 and 402, deals with |
| public companies in India, we tend to see some | | | | emergent situations or extraordinary circumstances |
| irregularities and they tend to happen and there are | | | | where the normal corporate management has failed |
| limitations. | | | | and has run into oppression or mismanagement and |
| I was concentrating more on private companies or | | | | steps are required to be taken to prevent oppression |
| the closely held companies. It is not easy for | | | | and/or mismanagement in the conduct of the affairs |
| everyone to go for big expansions and establishing a | | | | of the company". |
| big corporate entity instantly. We know the | | | | Dealing with the issue as to how the word |
| requirements for getting a public company listed in a | | | | ‘oppression' is to be construed for the purpose |
| stock exchange and we are aware of SEBI (DIP) | | | | of granting relief under section 397 or 398, the |
| regulations. A business gets established and expanded | | | | Supreme Court of India, in Sangramsinh P.Gaekwad |
| step-by-step and as such Private Limited Companies | | | | and others. Vs. Shantadevi P.Gaekwad (Decd.) by Lrs. |
| or the closely held companies occupy greater | | | | And others (2005) 123 Comp Cases 566,was pleased |
| significance. We see many private companies owned | | | | to observe that "the expression "oppressive", it is |
| by a family and there tend to be many groups and | | | | now well settled, would mean burdensome, harsh and |
| interesting corporate arrangements in closely held | | | | wrongful. "Oppression" complained of must relate to |
| private companies. In view of the fact that there are | | | | the manner in which the affairs of the company are |
| no strict regulations governing the shareholding | | | | being conducted and the conduct complained of must |
| pattern in private companies, we very often see that | | | | be such as to oppress the minority members. By |
| many private companies are controlled by two | | | | reason of such acts of oppression, it must be shown |
| groups and even otherwise, there tend arise | | | | that the majority members obtained a predominant |
| groupism in the Company. When the trust is lost | | | | voting power in the conduct of the company's |
| between or among groups in the Private Limited | | | | affairs. The remedy under section 397 of the |
| Companies, then, one group tend to oppress other | | | | Companies Act is not an ordinary one. The acts of |
| and in some cases, a group will always try to create | | | | oppression must be harsh and wrongful. An isolated |
| problems to the majority in the Company and try to | | | | incident may not be enough for grant of relief and a |
| take-over the Company too. These differences | | | | continuous course of oppressive conduct on the part |
| between or among groups in a Private Limited | | | | of the majority shareholders, is, thus, necessary to |
| Company may lead to approaching the Company | | | | be proved. The acts complained of may either be |
| Law Board under section 397/398 of the Companies | | | | designed to secure pecuniary advantage to the |
| Act, 1956. Section 397/398 of the Companies Act, | | | | detriment of the oppressors or wrongful usurpation |
| 1956 provides protection to the minority against | | | | of authority". The court went on observing that "but |
| oppression and mismanagement in the Company. | | | | this would not mean that section 397 provide for a |
| Though, only a group of minority shareholders in the | | | | remedy for every act of omission or commission on |
| Company who are qualified to approach the | | | | the apart of the board of directors. Relief must be |
| Company Law Board under section 399, can | | | | granted having regard to the exigencies of the |
| approach Company Law Board under section 397 | | | | situation and the court must arrive at a conclusion |
| 398 of the Companies Act, 1956 seeking preventing | | | | upon analyzing the materials brought on record that |
| measures to put an end to the matters complained | | | | the affairs of the company were such that it would |
| of, even the majority approaches Company Law | | | | be just and equitable to order winding up thereof and |
| Board alleging oppression and mismanagement | | | | that the majority acting through the board of |
| typically. The Company Law is very complicated and | | | | directors by reason of abusing their dominant position |
| it is not easy for an adjudicating forum to decide and | | | | had oppressed the minority shareholders. The |
| give directions to the Company or the Shareholders. | | | | conduct, thus, complained of must be such so as to |
| An adjudicatory forum should concentrate on the | | | | oppress a minority of the members including the |
| concept of company law and various other | | | | petitioners vis-à-vis the shareholders which a fortiori |
| stake-holders who are not before it and it makes a | | | | must be an act of the majority. Furthermore, the |
| proceeding before the Company Law Board delayed | | | | fact situation obtaining in the a case must enable the |
| at times. There will not be any difficulty in | | | | court to invoke just and equitable rules even if a |
| entertaining an application seeking to condone the | | | | case has been made out for passing an order of |
| delay in filing the required documents with the | | | | winding up of the company but such winding up |
| Authorities and such applications can easy be | | | | order would be unfair to be minority members". |
| disposed of by imposing fine etc. | | | | Again, the court laudably concluding the issue was |
| Though, there is so much logic behind mandating the | | | | pleased to proceed that "when a complaint is made |
| companies to maintain some registers and file certain | | | | as regards violation of a statutory or contractual |
| documents with the Registrar of Companies, many | | | | right, the shareholder may initiate a proceeding in a |
| private companies may not be able to show strict | | | | civil court but a proceeding under section 397 of the |
| adherence to the provisions of Companies Act, 1956. | | | | Act would be maintainable only when an |
| Taking note of the factual issue with regard to filing | | | | extraordinary situation is brought to the notice of the |
| of documents with the Registrar of Companies etc, | | | | court keeping in view the wide and far-reaching |
| the Ministry has not proposed a Scheme to compel | | | | power of the court in relation to the affairs of the |
| the companies to comply with the filing requirements | | | | company. In this situation, it is necessary that the |
| now. | | | | alleged illegality in the conduct of the majority |
| I have heard from the corporates, seen the | | | | shareholders is pleaded and proved adduced in the |
| proceedings and perceived the things and often feel | | | | proceedings remain unsatisfactory to arrive at a |
| that the majority in a Company is being troubled by | | | | definite conclusion of oppression or mismanagement, |
| minority and at times the minority is not able to get | | | | the petition must be rejected". |
| their rights effectively safeguarded despite | | | | Dealing with the concept of Company Law and the |
| establishing a clear case of oppression and | | | | precious rights of the shareholders, the Supreme |
| mismanagement in the Company. | | | | Court of India, in Dale and Carrington Invt. P.Ltd. and |
| Though, a lot can be discussed on Company Law in | | | | another Vs. P.K.Prathapan and others, (2004) 122 |
| India, the issue of redressel mechanism, the issue of | | | | Comp Cases 161, was pleased to observe that "a |
| civil courts jurisdiction, the issue of constitution of | | | | company is a juristic person, it acts through its |
| National Company Law Tribunal, the issue of | | | | directors who are collectively referred to as the |
| effectiveness of the remedy etc., I would like to | | | | board of directors. An individual director has no |
| confine myself in this Article to a case study on an | | | | power to act on behalf of a company of which he is |
| issue under section 397/398 of the Companies Act, | | | | a director unless by some resolution of the board of |
| 1956. | | | | directors of the company specific power is given to |
| I would like deal with the issue of requirement to see | | | | him. The directors act on behalf of a company in a |
| the bonafides on the parties approaching the | | | | fiduciary capacity and their acts and deeds have to |
| Company Law Board under section 397/398 of the | | | | be exercised for the benefit of the company. To the |
| Companies Act, 1956. Majority of the companies in | | | | extent the power of the directors is delineated in the |
| India and especially Private Limited Companies may | | | | Memorandum and Articles of Association of the |
| not be able show strict adherence to the provisions | | | | company, the directors are bound to act accordingly. |
| of Companies Act, 1956. As such, for everyone, it is | | | | The fiduciary capacity within which the directors have |
| very easy to point-out the irregularities in a Company | | | | to act enjoins upon them a duty to act on behalf of |
| and a group sometimes tries to create problems to | | | | a company with utmost good faith, utmost care and |
| the majority citing the irregularities by approaching | | | | skill and due diligence and in the interest of the |
| the Company Law Board under section 397/398 of | | | | company they represent. They have duty to make |
| the Companies Act, 1956. | | | | full and honest disclosure to the shareholders |
| We can find so many judgments of Constitutional | | | | regarding all important matters relating to the |
| Courts on section 397/398 of the Companies Act, | | | | company. It follows that in the matter of issue of |
| 1956 and the courts have ruled and maintained some | | | | additional shares, the directors owe a fiduciary duty |
| principles as to how the provisions of section 397 | | | | to issue shares for a proper purpose. This duty is |
| 398 of the Companies Act, 1956 are to be | | | | owned by them to the shareholders of the company. |
| interpreted. I feel that despite the settled legal | | | | Therefore, even though section 81 of the Companies |
| principles, the facts of each case to be carefully gone | | | | Act, 1956, which contains certain requirements in the |
| into in a petition under section 397/398 of the | | | | matter of issue of further share capital by a |
| Companies Act, 1956 and many directions or orders | | | | company, does not apply to private limited |
| are passed based on facts. We know as to how the | | | | companies, the directors in a private limited company |
| judgments of the Constitutional Courts are sought be | | | | are expected to make a disclosure to the |
| interpreted in Subordinate Courts and High Courts | | | | shareholders of such a company when further shares |
| despite the mandate under Constitution of India. | | | | are being issued. The acts of directors in a private |
| I would like to present a case study followed by an | | | | limited company are required to be tested on a much |
| analysis on section 397/398 of the Companies Act, | | | | finer scale in order to rule out any misuse of power |
| 1956 and the facts of the case are as follows: | | | | for personal gains or ulterior motives thus casting a |
| 1. There are two groups in a Company wherein group | | | | heavier burden on its directors". |
| ‘A' holds 85% of the shareholding and the group | | | | My opinion on the issue: |
| ‘B' holds the remaining 15%. | | | | Though, there are so many judgments of Company |
| 2. The Company was in existence for more than 10 | | | | Law Board, the High Court and the Supreme Court |
| years and was doing well. | | | | as to how section 397/398 of the Companies Act, |
| 3. The Company's Board comprises two directors | | | | 1956 are to be interpreted and as I feel, there is no |
| from the minority group too. | | | | deviation in reiterating the legal position so far on the |
| 4. All the decisions in the Company were taken with | | | | issue. Despite reiterating the concept, the |
| consensus in the Board and in the AGM as required | | | | interpretation of the judgments and understanding |
| under the provisions of Companies Act, 1956. | | | | the concept is a complicated thing always. |
| 5. There were no concealment of transactions or | | | | But, there is no judgment, as far my knowledge |
| arrangements in the Company and both groups | | | | goes, as to whether the minority group can allege |
| clearly aware of all the transactions and | | | | their own acts as oppressive in order to get a relief |
| arrangements and everything was done in the | | | | against majority. If the minority was having the |
| Company with consensus. | | | | knowledge of all the transactions in the Company for |
| 6. After 10 years, difference of opinion arose | | | | a considerable time, then, though, there exist |
| between the parties. | | | | irregularities in the company, the minority may not be |
| 7. The minority group has listed-out so many | | | | right in using their own acts or the consented acts |
| transactions of the Company in the past 10 years in | | | | for getting a relief under section 397/398 of the |
| its petition to the Board under section 397/398 of | | | | Companies Act, 1956 as it is against the object of |
| the Companies Act, 1956 and alleges oppression and | | | | the Chapter in my opinion. It is an important issue to |
| mismanagement on the part of majority group in the | | | | deal with and the authority of the Company Law |
| Company. | | | | Board to pass orders in such matters will depend |
| 8. All the transactions listed-out by the minority in its | | | | upon the shareholding pattern of the Company and |
| petition to the Board were taken place with the | | | | also other stake-holders. |
| consent and the knowledge of the minority. | | | | Note: The views expressed are my personal and I |
| 9. Admittedly, there were few irregularities in the | | | | am aware of the plethora of concepts under the |
| functioning of the Company and these irregularities | | | | Chapter. |
| were taken place in the past 10 years and were with | | | | |