|
|
Petition under Section 397/398 – Importance of Prayer
– a Case Study
[Submitted by V. Durga Rao,
Advocate, Madras High Court]
January 15, 2011
Every one knows the object of section 397/398 of the Companies Act,
1956 and it is to bring an end to the matters complained of and to
regulate the affairs of the Company in future. A great responsibility is
cast on the Company Law Board under section 397/398 of the Companies Act,
1956 and it is not only an adjudication of dispute between two
shareholding groups, but, it is to find ways as to how to put an end to
the matters complained of and as to how to regulate the affairs of the
Company. Only when it is not possible to put an end to the matters
complained of or to regulate the affairs of the Company, the Company Law
Board may finally ask one group to leave the Company by selling their
shares at a fair price to be determined by the valuers and to be confirmed
by the Company Law Board. Only when all these efforts to fail, it is
recommended for winding-up of the Company. Several complications are there
in a proceeding under section 397/398 of the Companies Act, 1956 and one
should be careful while pursuing the remedy, presenting the case in view
of the stakes normally involved in any Company. These internal disputes
normally come in closely held private companies which operate on the
principles of partnership. Strange arrangements can be seen in some
closely held Private Companies and in some cases, completely ignoring that
the Company is a separate juristic person, stake holders take funds from
the Company and also use their personal funds to repay the liabilities of
the Company. All these things practically happens in many companies and in
view of these complications, giving a finding justifying principles of law
and equity, would be a difficult task for the Company Law Board under
section 397/398 of Companies Act, 1956. There exist complications in
resolving disputes between the shareholding groups when it is a closely
held private company in view of complicated internal transactions and
arrangements, and there exist complications even in public companies in
view of the interests of various stake-holders and the need of adhering
provisions of the Act strictly.
Thus, in view of the stakes involved and complications, a proceeding
under section 397/398 of the Companies Act, 1956, if pursued, is to be
done carefully. Presenting the facts, filing the documents, bringing the
additional facts to the knowledge of the Board from time to time,
rebutting the allegations, the prayer part and making concessions and
everything plays an important role in a petition filed under section
397/398 of the Companies Act, 1956 alleging oppression and mismanagement.
I would like to present a case study highlighting at the importance of
asking relief in the Petition under section 397/398 of Companies Act, 1956
and the relevant facts are as follows:
- Two groups, with a clear understanding of business needs, formed a
Private Limited Company.
- In the Group-A there are two shareholders and from Group – B there
are three shareholders.
- Shareholders from each group has acted as promoters of the Company
and subscribed to the Memorandum and Articles.
- After incorporation, the groups had clear arrangements to run the
Company and they have jointly taken the business decisions and operated
Bank Accounts of the Company.
- The business went on smoothly for some time and after few years;
there was mistrust between the two groups. Group A is holding 40% shares
in the Company while the Group B holds 60 % of shares.
- The Group-B, being the majority, has taken certain business
decisions without consulting Group-A. Certain resolutions were passed
allegedly without informing Group-A.
- At one point of time, Group-A has decided to come-out of the Company
or to get the Company back to track without any mismanagement or
prejudice to the members.
- Group-A has filed a Petition under section 397/398 of Companies Act,
1956 against the Company and by making Group-B as parties to the
proceeding.
- In the Petition, Group-A has focused mainly on two issues viz.,
buying the shares of the majority at a fair price or in alternative, the
majority should buy their shares at the fair price so that one group
will ultimately be out of the Company and there will not be any problem
in the Company.
- In a proceeding before the Company Law Board, the Petitioner could
establish that decisions were taken without any meeting, no minutes were
maintained, financial statements are not filed, registers as required is
not maintained and all these issues are further confirmed by the
Commissioner appointed by the Company Law Board to authenticate the
Books of Account of the Company.
- In the final order of the Company Law Board in a petition filed by
Group-A, the Company Law Board has come to the conclusion that the trust
between groups is completely lost and as such though the Group-A could
establish his case clearly, the Board has asked the Group-A to sell
their shares to Group-B in view of the prayer sought.
Analysis:
In the above case, there could not have been any prayer for direction to
the majority group to buy the shares of the Petitioner as it is not the
intention of the Petitioner at all. The intention of the Petitioner is to
get the disputes resolved and nothing more. Being the promoter of the
Company, being the contributor of the Company’s growth and the being the
victim of oppression and mismanagement by the majority and having
established the case, the Petitioner may not want to quit form the
Company, but, it is difficult to turn the order back in view of the relief
sought in the Petition. These are all the complications with few simple
things. Even in the absence of prayer relating to exit, the Company Law
Board will consider all those options and submissions can be made at any
time before the Board in the course of the proceeding. A good case of
Group-A, the Petitioner, is being weakened in view of the specific prayer
sought in the Petition. Even if the order is appealed, as the Group-A has
expressed his willingness to exist specifically in the prayer, the same
will be taken note of. In the absence of such a prayer and in the light of
proving all the facts like no meetings, fictitious resolutions, no
registers etc., Group-A could have pressed for preventive and remedial
measures and infact, could have pressed for buying the shares of majority
as there can not be any hard and fast rule in a proceeding under section
397/398 of Companies Act, 1956. A simple or may be, inadvertent mistake
can really cost a lot and a relief under section 397/398 of the Companies
Act, 1956 is to be carefully pursued and one should imagine the work-load
of Company Law Board in remembering many issues and reading bulk of papers
in each and every case. It may not be practically possible for any
adjudicatory authority to read all the facts or re-collect all the facts
pertaining to a case and especially in a case like oppression and
mismanagement.
Note: The few facts highlighted do not represent any case I have
represented or came to know and the facts are presumptive. The intention
is to highlight the significance of ‘relief’ in a petition alleging
oppression and mismanagement and nothing more.
Go to
"Articles" Listings |
|
