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Is it correct to interpret section 399 of Companies Act, 1956 technically and strictly?

It is known that section 397/398 of Companies Act, 1956 substantially provide relief to the minority shareholders/shareholders against the oppression/mismanagement by the Company or the Majority Shareholders in the Company.  Though it is not clear and can not be clear unless the law is suitably amended as to the nature of the powers exercised by the Company Law Board, it can be easily ascertained that the powers of the Company Law Board under section 397/398 of the Companies Act, 1956 are preventive in nature substantially. Many shareholders feel that the Company Law Board is to be provided with elaborate powers to deal with all issues when the disputes arise between two groups in the Company or among the shareholders. When the position as to the powers of Company Law Board is not clear, then, at times, the shareholders approaching the Company Law Board may suffer irreparable damage and they have to approach different forums seeking different relief aimed at preventing the oppression and mismanagement by the majority in the Company.

Despite the feeling in many petitioners under section 397/398 of the Companies Act, 1956 that the remedy provided is not effective, the shareholders are left with no option except to approach the Company Law Board seeking preventive measures and when the Company is a going concern. When the Company is a going concern, it is not easy for the minority group to straight away ask for winding-up of the Company and even if the Company Court is approached seeking winding-up of a going concern on ‘just and equitable' ground, the Company Court may advice the petitioners to avail the alternative remedy provided under section 397/398 of the Companies Act, 1956.

There are many complicated issues in a proceeding under secti8on 397/398 of the Companies Act, 1956. In order to approach the Company Law Board under section 397/398 of the Companies Act, 1956, the Petitioners should qualify under section 399 of the Act. There is a procedural requirement to present the petition under section 397/398 like filing the proof of holding/membership and filing the consent showing that the Petitioners representing the Company have the consent of other Petitioners. There are many precedents on the issue of consent too. While there can be serious objection as to the maintainability of a Company Petition under section 397/398 of the Companies Act, 1956 when the Petitioners are not qualified under section 399, section 399 is also sought to be relied on technically and substance is ignored at times. The important issues under section 399 of the Companies Act, 1956 are as follows:

1. The Company or the majority can object to the maintainability of the Company Petition at the initial stage on the ground that the Petitioners are not qualified under section 399:

When the maintainability of the Company Petition under section 397/398 is questioned relying on section 399 at the initial stage itself, then, the Company Law Board can look into the issue and determine maintainability. If certain facts like holding and membership is disputed by the two groups, then, the Company Law Board can entertain the Petition provided other requirements are fulfilled and the issue of maintainability can be decided finally.

2. The Company or the majority can raise the issue of maintainability of the Petition under section 399 in the middle of the proceeding or at the final stage:

In my opinion, it may not be correct to entertain the issue of maintainability relying on section 399 if the Company or the majority is silent on the issue of maintainability initially. If there is a dispute from the beginning as to the maintainability of the Company Petition, then, such plea can be entertained at the final stage as required. In a proceeding under section 397/398 of the Companies Act, 1956 can not be equaled with other civil proceeding and the remedy provided is extraordinary and with great object dealing with the corporate world.

3. As a proceeding under section 397/398 tend to be pending for a considerable time in view of various complications and when few of the Petitioners have died during the proceeding, the issue of consent from the legal representatives becomes debatable:

It is a technical objection and it should be entertained so carefully keeping in view of the object of the provisions and other relevant facts into consideration. When Petitioners are substantially before the Board despite the death of few petitioners, the Company Law Board can proceed with determining the Company Petition. Contrary to that, when the substantial number of Petitioners are died and the legal representatives do not show any interest in continuing the proceeding against the Company or the majority, then, the Petition can definitely be dismissed. A straight principle in this regard can not be laid and it depends upon the facts and circumstances of each and every case.

I would like extract the references in a judgment of Hon'ble Supreme Court on the issue of technical deficiencies in filing the Petition and on the issue of interpretation of section 399 of Companies Act, 1956 and those references are as follows:

Supreme Court of India  in J.P. Srivastava & Sons Pvt. Ltd. & Others Vs. M/s. Gwalior Sugar Co. Ltd. & Others (2004 (9) Scale 60 : 2005 AIR(SC) 83 : 2004 (9) JT 507 : 2005 (1) SCC 172 : 2004 (7) Supreme 794, 2004 (122) CC 696)

"Given these powers in the CLB, we cannot hold that non-compliance with one of requirements in Sri No. 27 in App. III of Reg. 18 goes to the very root of the jurisdiction of the CLB to entertain and dispose of a petition under Sections 397, 398. All that regulation 18 requires by way of filing of documents, is proof that the consent of the supporting shareholders had in fact been obtained prior to the filing of the petition in terms of Section 399(3). It cannot be gainsaid that it is open to the persons opposing the application under Sections 397 and 398 to question the correctness of an assertion as to consent made by the petitioner. It is equally open to the petitioner to provide evidence in support of the plea taken in the petition. If of-course the objection to the maintainability is taken by way of demurrer, the CLB can decide the issue on the basis of the averments contained in the petition alone, accepting the pleas therein as correct. But where the CLB takes into consideration facts outside the petition as it has done in this case, it cannot foreclose the petitioner from supporting its case in the petition on the basis of evidence not annexed thereto. Since the CLB calculated the total shareholding of the company including preference shares based on the allegations contained in the respondent No.8's application, it was for the CLB to determine the issue of actual prior consent on evidence. This view finds support from Reg. 24 which says:

24. Power of the Bench to call for further information / evidence: The Bench may, before passing orders on the petition, require the parties or any one or more of them, to produce such further documentary or other evidence as the Bench may consider necessary:-

(a) for the purpose of satisfying itself as to the truth of the allegations made in the petition; or

(b) for ascertaining any information which, in the opinion of the Bench, is necessary for the purpose of enabling it to pass orders on the petition."

On the issue of interpretation:

"The object of prescribing a qualifying percentage of shares in petitioners and their supporters to file petitions under Sections 397 and 398 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company. However it is of interest that the English Companies Act contains no such limitation. What is required in these matters is a broad commonsense approach. If the Court is satisfied that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the company in litigation is not lightly done and that it should pass orders to bring to an end to the matters complained of and not reject it on a technical requirement Substance must take precedence over form. Of course, there are some rules which are vital and go to the root of the matter which cannot be broken. There are others where non-compliance may be condoned or dispensed with. In the latter case, the rule is merely directory provided there is substantial compliance with the rules read as a whole and no prejudice is caused."

Note: the views expressed are my personal and I am aware of various other complicated issues in the proceeding as referred to.

About the Author

V.DURGA RAO, Advocate, Madras High Court.

Email: vdrao_attorney@yahoo.co.in

http://indiancorporatelaws.blogspot.com/

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