| I have been writing articles on various issues touching | | | | 1. A closely held Private Company is incorporated in |
| the corporate world and especially the issues under | | | | the year 1992 having family members as the |
| Companies Act, 1956. I was concentrating more on | | | | shareholders. The head of the family and his two |
| the law pertaining to Oppression and Mismanagement | | | | sons are shown as Managing Director and Joint |
| as dealt with under section 397/398 of the | | | | Managing Directors respectively in the Articles of |
| Companies Act, 1956. Law governing the rights of | | | | Association. |
| the minority, the propriety of the majority and the | | | | 2. The Company was making profits continuously. |
| protection given to the shareholders under section | | | | The head of the family and the Managing Director |
| 397/398 of the Act, is always very interesting and | | | | held substantial number of shares in his name. |
| also complicated. There are many interesting and | | | | 3. The properties belonging to the family were |
| complicated issues under section 397/398 of the | | | | partitioned duly during the life time of the Managing |
| Companies Act, 1956. We normally see the allegations | | | | Director itself and it is in the year 2002. |
| of Oppression and Mismanagement in private | | | | 4. The Managing Director and head of the family has |
| companies and closely held public companies and it is | | | | held substantial number of shares in his name even |
| really rare to see the allegations of Oppression and | | | | after the Partition and he is at liberty to dispose the |
| Mismanagement in respect of listed Public Companies | | | | shares as per his wish and will. |
| and it can attributed to the plethora of regulations | | | | 5. The head of the family and the Managing Director |
| prescribed by SEBI, the shareholding patterns and the | | | | has executed a will bequeathing his shareholding to |
| mandate of Corporate Governance. | | | | one of his son initially during the year 2005 and the |
| A petition under section 397/398 of the Companies | | | | reference for him is "A" while the other son is |
| Act, 1956 is to be carefully handled by the Petitioner | | | | referred to herein as "B". |
| who approaches the Company Law Board, the | | | | 6. The head of the family has revoked his ‘will' |
| majority in the Company against whom an allegation | | | | executed during the year 2005 infavour of "A" and |
| of Oppression and Mismanagement is made and also | | | | executes another will in the year 2006 and it is duly |
| by the adjudicatory forum or the Company Law | | | | probated. In the second ‘will' executed in the |
| Board. It is very complicated litigation as I feel and as | | | | year 2006, the head of the family bequeaths his |
| I have seen the litigation practically. The presentation | | | | shareholding in favour of "B". |
| of case is difficult and also deciding the case will also | | | | 7. "A" has the knowledge of the ‘will' executed |
| be difficult at times. | | | | by his father in favour of "B" and he remains silent |
| There are minority shareholders who say that their | | | | and "B" was not questioned. |
| rights and interests are not being protected properly | | | | 8. The head of the family and the managing director |
| despite the guarantee of their rights on paper under | | | | has expired in the year 2008 and after the expiry; |
| the provisions of the Companies Act, 1956. On the | | | | "B" has called for a Board meeting for transmission of |
| same footing, there are majority who feels that | | | | shares in his favour pursuant to the "will" executed in |
| section 397/398 of the Companies Act, 1956 is being | | | | his favour during the year 2006. |
| misused and the majority in the Company is being | | | | 9. "A" files a Civil Suit in the year 2008 itself seeking |
| troubled unnecessary abusing the process and they | | | | for a declaration that the Will executed by his father |
| are not able to concentrate on their regular affairs. | | | | in the year 2006 in favour of "B" is null and void. No |
| I want to deal with the issue of maintainability of the | | | | orders were obtained from the Civil Court and the |
| Company Petition on the ground that the essentials | | | | case is simply pending and even "A" is not attending |
| for maintaining the petition under section 397/398 of | | | | the court regularly. |
| the Companies Act, 1956 are prima facie absent. It is | | | | 10. Now, "B" becomes majority in the Company |
| really an interesting issue and a case I have been | | | | having 89% shareholding and "A" is having only 11% |
| asked to handle which prompted me to deal with the | | | | shareholding. |
| issue and write something. | | | | 11. The Company is being effectively maintained by |
| We do see filing interim applications in the main | | | | "B" as he is the majority and the Company maintains |
| Company Petition under section 397/398 of the | | | | documents and also accounts without any |
| Companies Act, 1956 requesting the Company Law | | | | concealment of facts whatsoever. The Company |
| Board to take-up the issue of maintainability as | | | | sends the notice of Board to the "A" as he is also a |
| preliminary issue and consequently asking for dismissal | | | | director. |
| of the Company Petition. I do believe that the | | | | 12. "A" never attends the Board meetings; however, |
| application seeking maintainability of Company Petition | | | | he is jealous of "B" as he is holding majority |
| are rarely entertained or allowed practically by the | | | | shareholding in the Company and wanted to trouble |
| Board and there can be good justification for that | | | | him. |
| also. Instead of taking up the issue of maintainability, | | | | 13. Now, "B" files a petition before the Company Law |
| the Company Law Board may ask the parties to file | | | | Board leveling vague allegations and alleging |
| their papers like reply with documentary proof and | | | | oppression and mismanagement. No specifics have |
| the Company Petition can be decided finally and after | | | | been given by "A" in his Petition and it is prima facie |
| final hearing as per the regular procedure. | | | | is clear that there is no substantial allegation of |
| The issue of maintainability of a Company Petition | | | | Oppression and Mismanagement and that to having |
| under section 397/398 of the Companies Act, 1956 is | | | | continuing nature. |
| normally raised on the ground that the petitioners do | | | | Discussion: |
| not qualify to present the Petition under section 399 | | | | The facts of the case are very clear that the |
| and at times, procedural irregularities can also be | | | | majority is being troubled by minority by leveling |
| pointed-out while asking for dismissal of the Company | | | | some baseless allegations and files a Petition under |
| Petition prima facie. I personally feel that the | | | | section 397/398 of the Act. Now, "B" is scared of |
| applications seeing maintainability are not entertained | | | | the proceedings as he has not done anything illegal |
| without looking into the entire issue after asking the | | | | and he wants the dismissal of the Petition prima facie. |
| opposite party to file their detailed reply to the main | | | | It is an interesting issue. There can be two |
| Company Petition. Its my opinion. Again, it is an issue | | | | arguments on the issue. One is that the "B" should |
| as to whether an application under section 397/398 | | | | not suffer a proceeding under section 397/398 of |
| of the Companies Act, 1956 is to be dismissed on | | | | the Act where there is no case prima facie. The |
| procedural irregularities and on the disputes pertaining | | | | second argument is that the issue as to whether |
| to share holding and consequent qualification under | | | | there is prima facie case exists or not, is to be |
| section 399. Because, the object of section 397/398 | | | | decided after the full proceeding and can be decided |
| has been referred to extensively by the Company | | | | only during the final hearing and it may take few |
| Law Board, High Court and also Apex Court in many | | | | years practically as we see. |
| cases. | | | | Conclusion: |
| While I have exposed the practical things when it | | | | It is really very difficult to conclude the issue as to |
| comes to filing applications questioning the | | | | whether an application seeking dismissal of the main |
| maintainability of a Company Petition under section | | | | Company Petition under section 397/398 be |
| 397/398, I want to deal with the issue of | | | | entertained on the ground that the essentials under |
| maintainability on the ground that the essentials to | | | | the section are not made-out prima facie. In my |
| maintain a petition under section 397/398 of the | | | | personal opinion, such an application can be |
| Companies Act, 1956 are absent prima facie and in | | | | entertained, but, it will really be seen as the Company |
| those cases, an application questioning the | | | | Law Board normally favours settlement of the case |
| maintainability of the petition under section 397/398 is | | | | where the Company is a family company or closely |
| maintainable. | | | | held Company, and it is only when there is no |
| First I want to present the facts of a case with | | | | likelihood of settlement, the Company Petition is |
| which I am connected to and then there is a | | | | decided in accordance with law. |
| discussion on the issue of maintainability of the | | | | Note: The views expressed are my personal and the |
| Company petition at the end hereunder. | | | | write-up is academic. |
| Facts of the Case: | | | | |