The Companies Act, 1956 governs the incorporation, management and winding-up of any company in India. There will be differences among members or between groups in private companies and closely held public companies very often. One group may not have trust on other group who manages the affairs of the Company. One group may suspect the deeds of the management in a Company. These are really very complicated things like human relations. What happens practically is that the Company may conceal certain things, may not record certain things in its books, may undervalue certain things and may overvalue certain things. If we keep the regulations governing the companies in India and the provisions of Companies Act, 1956 apart, the companies and especially private companies and closely held public companies may shield certain things for different purposes. It happens normally in many private limited companies and public limited companies and the listed public company can be an exception though some may show Satyam Episode as an example that even the listed public companies are prone to this kind of management. Due to mistrust among members or between groups, each group in a company try to take dominant position in the Company by diluting the existing shareholding at times and by diverting the funds to its sister concerns. By diluting the existing shareholding, the minority becomes majority at times and vis a vis. These acts are referred as “oppression” and “mismanagement” in Companies Act, 1956.
The Act provides for the remedy against the majority in a company who resort to oppression and mismanagement. The Company Law Board, at present, is empowered to entertain applications under section 397/398 of the Act from the shareholders who qualify under section 399 of the Act and to pass appropriate orders keeping in view of the scheme of the Chapter. While it is sure and specific that the Company Law Board is empowered to pass orders as it thinks fit to put an end to the matters complained of, the issue of passing remedial orders is bit complicated. Company Law Board is specifically empowered to pass preventive orders under section 397/398 of the Act. But, if we peruse the provisions dealing with the powers of Company Law Board, the power of Company Law Board under section 397/398 appears to be inclusive and to a very limited extent it can pass remedial measures.
There are some precedents that Company Law Board follows summary procedure and as such the disputed facts can not be decided by Company Law Board under section 397/398 of the Act. The proposition as referredto is very very significant. Because, when a shareholder or a minority prays for some remedial measure like setting aside some transaction entered into by the company or some agreement, then, there should be a full enquiry into the issue adhering to the settled principles of law. Yes, it is true that section 402 of the Act provides even for setting aside some agreements entered into by the majority to a very limited extent. But, the power of Company Law Board under section 397/398 in passing remedial measures can not be seen at par with passing preventive measures at present. This is the complicated area and very important issue under section 397/398 of the Companies Act. This issue is sought to be addressed by the proposed companies’ bill which contains a specific bar on civil courts in entertaining company matters. At present, there is no bar on civil courts in entertaining suits filed against a company under general law. This issue is to be addressed.
A brief on powers of Company Law Board under section 397/398 of the Act is as follows:
It is really very difficult to codify the powers of the Board under section 397/398 of the Act. Obviously, the Board has wide powers or powers to pass such orders in order to put an end to the matters complained of. While all the sections under the chapter deal with the powers of Board in an application under sections 397/398 of the Act, prominently, sections 397, 398, 402 and 402 deals with the powers of Board. Without prejudice to the powers conferred on the Tribunal under section 397/398, section 402 confers certain powers expressly as follows:
(a)the regulation of the conduct of the company’s affairs in future.
(b)The purchase of the shares or interests of any members of the company by other members thereof or by the company.
(c)In the case of a purchase of its shares by the company as aforesaid, the consequent reduction of it share capital.
(d)The termination, setting aside or modification of any agreement, howsoever arrived at, between the company on one hand, and nay of the following persons, on the other namely: -
(i) the managing director,
(ii) any other director,
(iii) and (iv)----
(iv) the manager,
upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in all the circumstances of the case.
(e)the termination setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, setting aside or modified except after due notice to the party concerned and provided further hat no such agreement shall be modified except after obtaining the consent of the party concerned,.
(f) the setting aside of any transfer, delivery f goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference.
(a)Any other matter for which in the opinion of the Tribunal it is just and equitable and provision should be made.”
Further, other sections under the Chapter confer certain powers upon CLB and those are as follows:
Section 403 - The section confers power on the Tribunal to pass interim orders.
Section 404 - Effect of the order altering the memorandum and article which implies the power of the Tribunal to modify memorandum and articles of association of a company.
Section 405 - Power to add certain respondents in an application under section 397/398 of the Act.
Section 406 - The section says that, in relation to an application under section 397 or 398, sections 539 to 544 both inclusive, shall apply in the form set forth in Schedule XI.
By reading section 397, 398, 402, 403, 404, 405 and 406, and Schedule XI, with regard to the powers exercisable by the Tribunal under section 397/398; the following points emerge for consideration.
(1) The nature of powers passed by the Tribunal under sections 397/398 is preventive in nature normally except to a very limited extent.
(2) The Tribunal will have unfettered freedom in passing any interim or final orders under section 397/398 of the Act adhering to the basic principles like putting an end to the matters complained of.
(3) The powers of Company Law Board under section 397/398 are inclusive in nature and those can not be put to precise.
(4) The power of the Tribunal under other sections under the chapter will be in addition to the powers exercisable by the Tribunal under sections 397/398 of the Act.
(5) While it is true that the Tribunal is conferred with certain specific powers under section 402 in addition other powers under section 397/398, the exercise to be done carefully. The stress to be laid on clause (f) which restricts the power of the Tribunal while setting aside any agreement or otherwise.
(6) Even section 402 confers ample power on the Tribunal to pass such orders if the Tribunal feels the same as just and equitable.
(7) Schedule XI of the Act confers certain additional powers like penalty for falsification of books, penalty for frauds by officers, liability where proper accounts not kept, liability for fraudulent conduct of business, power of the Tribunal to assess damages against delinquent directors etc. But, in practice, though certain other incidental or consequential powers are conferred on the Tribunal by virtue of section 406, the Tribunal may concentrate on advancing the object of the chapter by passing such orders in order to put an end the matters complained of. The Tribunal may resort to purposive interpretation while dealing the issues under the chapter.
(8) Though, the precedents on sections 397/398 gives an understanding as to the powers exercisable by the Tribunal under the chapter, the powers of the Tribunal can not be codified.
(9) To conclude, the Tribunal will have ample powers for putting an end the matters complained of or for advancing the object of the chapter.
In my opinion, the nature of remedy under section 397/398 of Companies Act, 1956 is preventive in nature and there is a need to clarify this in the proposed Companies Bill.
1. Provisions in the proposed companies bill dealing with oppression and mismanagement to be looked into.
2. I have expressed my opinion based on my practical experience with regard to the litigation before the Board and the research into the subject.
3. I request the readers to enlighten me on the issue and also the interesting issues under section 397/398.