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Section 397/398 of the Companies Act, 1956 guarantees a right to the minority to approach the Company Law Board or the Tribunal seeking preventive and some remedial measures against the majority in the Company when there is an ‘Oppression and Mis-management’ in the Company.  Only shareholders who are qualified under section 399 can approach the Company Law Board (CLB) under section 397/398 of the Companies Act, 1956.  Though Constitutional Courts have tried to define as to what constitutes ‘oppression’ and ‘mis-management’, infact, it is subjective always. But, the Courts have laid-down broad guidelines which are to be followed.  Certain issues are settled under section 397/398 of the Companies Act, 1956 despite the trend of granting relief or interim relief to the Petitioners even when there was no ‘Oppression and Mis-management’ in stricto senso.  In view of the stakes involved in most of the times, it is highly complicated exercise to deal with a petition under section 397/398 of the Companies Act, 1956. It is often criticized that the Company Law Board (CLB) is not effective in addressing the concerns of the minority shareholders. It is also been criticized that the jurisdiction of the Company Law Board is misused in most of the times and a negligent minority tries to stall the functioning of the Company at times. As such, every effort is normally made in making a good balance between the rights of the minority against the oppression and the rights of the majority shareholders in taking decisions without any hindrance and in the interests of the Company.

There were judgments on section 397/398 of the Companies Act, 1956 relying on technicalities even at the final stage. Now, in my opinion, technicalities are ignored and the substance is keenly noted in a petition under section 397/398 of the Companies Act, 1956. For example, there were many decisions on the issue of ‘consent’ under section 399 of the Act and there were judgments saying that disputed facts can not be decided by the Company Law Board and those require Trial. In the recent past, there were no such pronouncements.

But, it is very often seen where the shareholders approach the Company Law Board asking for injunction in conducting AGM’s, against the proposed removal from Directorship and against a particular resolution sought to be passed. It is true that unless the trust between the groups is lost, shareholders will not go for litigation and will not approach the Company Law Board. But, is it justified granting injunctions preventing conduct of meetings and granting injunction against a particular resolution?. It is again subjective and there can not be any straight-jacket formula in this regard as courts have laudably noted. The most important thing is that the materials placed before the Board and the averments should establish a prima facie case of ‘oppression’. But, unless there is a prima facie case of oppression or an action which is prejudicial to public interest, no interim order or injunction can be granted. Noting on the same lines, the Hon’ble High Court of Madras in N.Ram & others Vs. N.Ravi & others, reported in CDJ 2011 MHC 1037, was pleased to observe as follows:

44. On consideration, I find force in the contention raised by the learned Senior Counsel appearing on behalf of the appellants. The Hon'ble Company Law Board cannot issue injunction in implementing the decision to be taken by the shareholders in its meeting, unless the prima facie finding is recorded, that the decision is prejudicial to the public interest or the company at large.

45. This view was taken by the Hon'ble Company Law Board on an earlier occasion while rejecting the relief claimed against the decision to do away with family succession and it was left to the Board of Directors and shareholders, to consider this issue. It was always open to the shareholders to take a decision, in view of the earlier order.

46. The Hon'ble Company Law Board also failed to take note of the fact that the respondents were yet to file their counter, it was stated that the decisions to be taken in the EGM were likely to take sometime, therefore, there was no urgency to pass impugned order on 18th May itself, specially when the order could be made subject to the final decision to be taken by the Hon'ble Company Law Board.

47. The Hon'ble Supreme Court in the case of Life Insurance Corporation of India vs. Escorts Ltd and others (supra) had categorically laid down that it is not open to the Company Law Board to issue injunction with regard to functioning of the company.

48. As already observed above, in the order passed, no finding has been recorded regarding the resolution of the Board of Directors, that the matter placed before the EGM was prima facie prejudicial to the public interest or functioning of the company.

49. It is also well settled that the shareholders can only watch the proprietary interest in the company and cannot object to the day to day decision and functioning of the Company.

50. In this case, by placing the matter before the shareholders, the Board of Directors were seeking consent of the shareholders. If any civil rights of the parties were likely to be affected, then that can be subject matter of civil suit, but certainly will not be falling under Sections 397 and 398 of the Companies Act.

51. The resolution also prima facie cannot be said to be against the earlier order of the Hon'ble Company Law Board, as the relief with regard to succession, was specifically declined, leaving it open to the Board of Directors and its shareholders to take a final decision.”

Note: the views expressed are my personal and a point of view only. 

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Durga Rao
Category Corporate Law   Report

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