Oppression and mismanagement

CLB: Provisions of CPC not applicable, still could be applied to suppress the mischief and advance the cause of justice

Gurpartap Singh and another v. Vista Hospitality P. Ltd. and others [2014] 186 Comp Cas 202 (Delhi)

In this judgement two important questions are considered:

Q-1 whether majority shareholders can file petition of oppression under section 397 of the Companies Act, 1956?

Hon’ble Delhi High Court held that an objection that the petition was filed by the majority shareholders and hence not maintainable cannot be upheld. To come to this conclusion, it relied upon Calcutta High Court judgement by a Division bench, a Kerala High Court decision and a Supreme Court decision – as briefly narrated here under.

Hon’ble Division bench of Calcutta High Court – In Ramashankar Prasad v. Sindri Iron Foundry P. Ltd., AIR 1966 Cal 512 – it was argued in that case majority cannot complaint of oppression and in support reliance was placed on the judgement of the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC).  It held that section 399 can be applied as it only fixes lower limit as to who can file petition under sections 397 / 398. The Calcutta High Court rejected argument that apex court’s ruling in Shanti Prasad Jain (supra) is applicable – on the count that apex court in that judgement dealt with complaint of a minority; it had not gone into question whether majority can or cannot file complaint under section 397; speaking of section 397 read with section 399, the Supreme Court Shanti Prasad Jain (supra) observed ‘it gives a right to members of a company who comply with the conditions of section 399 to apply to the court for relief under section 402 of the Act or such other reliefs as may be suitable in the circumstances of the case of the affairs of a company are being conducted in a manner oppressive to any member or members including any one or more of those applying’. This quotation goes to show that in the view of the Supreme Court a member or members applying under section 397 had to qualify under section 399.

Hon’ble Kerala High Court in Dr. V. Sebastian v. City Hospital P. Ltd. [1985] 57 Comp Cas 453 (Ker) – it was held protection of sections 397 and 398 though intended primarily to protect the minority interest, it can also be used to protect the majority shareholders. Kerala High Court relied upon a Calcutta High Court judgement in Sindhri Iron Foundry P. Ltd., In re [1964] 34 Comp Cas 510 (Cal) where it was held that such a remedy is available to the majority when it is rendered ineffective by the wrongful acts of a minority.

Hon’ble Supreme Court in J. P. Srivastava and Sons P. Ltd. v. Gwalior Sugar Co. Ltd. [2004] 122 Comp Cas 696 (SC) noted that any member(s) of a company may apply under sections 397 and 398 to the CLB complaining of mismanagement or oppression provided such member(s) have the requisite shareholdings as prescribed under section 399 to do so.

Q-2 Whether CLB can reject petition at the threshold on highly technical ground?

Hon’ble Delhi High Court held that the CLB should be extremely reluctant to reject the petition under sections 397 and 398 at the threshold itself on highly technical ground.It was further held that the CLB cannot dismiss a petition under section 397/398 of the Companies act as not maintainable, unless the petition raises issues which are absolutely unarguable or frivolous or ina case where the petition does not disclose the satisfaction of the basic requirements of these sections.

It relied upon decision of a Bombay High Court in Jer Rutton Kavasmaneck v. Gharda Chemicals Ltd. [2001] 106 Comp Cas 25 (Bom). In that decision,an objection was that the petition under sections 397 and 398 was not maintainable and should be dismissed under Order 7, rule 11(a) of the Code of Civil Procedure, 1908 (‘CPC’) as it did not disclosed cause of action.

 

Q-3 whether the provisions of CPC are  applicable to proceedings before the Company Law Board (‘CLB’).

Before the establishment of the Company Law Board, petitions complaining of oppression and mismanagement were being filed before and dealt with by the High Courts. Under rule 6 of the Companies (Court) Rules, 1959, the provisions of the CPC, so far as they are applicable, applied to all proceedings under the Companies Act. And despite so, the objection of the respondents that the company petition should be dismissed in limine on the ground that it did not disclose any cause of action was rejected by courts.

Hon’ble Delhi High Court stated that “It should be the effort of the Company Law Board to bring to an end all matters complained of and towards this end the Company Law Board is empowered to make such order as it thinks fit. It is the interest of the Company that is the paramount consideration under section 397/398.

Relying upon decision of Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC),  it stated that the acts complained of as being oppressive have to be viewed in a wholesome manner and without dissecting them into separate, disjunctive or component parts of oppression. It is neither proper nor necessary to look at each act of oppression disjointedly.

Whenever the legislature so desired, specific provisions were enacted in the statutes creating the Tribunals as to the extent of the applicability of the provisions of the CPC in the functioning or the proceedings before such Tribunals. The result is that except the provisions of the CPC which have been so made applicable, the other provisions are not applicable. In Union of India vs. Madras Bar Association, (2010) 11 SCC 1, the Supreme Court has observed as under:
“(iii) While courts are governed by detailed statutory procedural rules, in particular the Code of Civil Procedure and the Evidence Act, requiring an elaborate procedure in decision making, tribunals generally regulate their own procedure applying the provisions of the Code of Civil Procedure only where it is required, and without being restricted by the strict rules of the Evidence Act.”

Hon’ble court concluded that …Unless specifically conferred, the provisions of the Civil Procedure Code (‘CPC’) are not applicable to CLB.

After so concluding, surprisingly, with respect, Hon’ble court said – it is possible to postulate an argument that though the provisions of the CPC are not applicable to the CLB, there is no prohibition in applying the principles evolved in the CPC! It further said that there is no quarrel with such an argument, subject to the caveat that the well recognised principles embedded in the elaborate provisions of the CPC can be invoked to the proceedings before the Company Law Board with a view to suppressing the mischief and advancing the cause of justice. These seems to be the purpose of regulation 44 of the Company Law Board Resolutions.

Sections 397 and 398 of the Companies Act read with Section 402 of the said Act confer wide powers and ample jurisdiction upon the Company Law Board to pass such orders and give such directions as it thinks fit to achieve the object. These powers are without any limitation or restriction and the only limitation on the exercise of such powers is that there should be a nexus between the order that may be passed by the CLB and the object sought to be achieved by these Sections.In order to reach the conclusion that the company’s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, it is open to the CLB to hold a thorough inquiry into the allegations made in the petition. If the allegations are found correct, the CLB is empowered to make such order as it thinks fit, with a view to bringing to an end the matters complained of. In order that the CLB may make an order under Section 397, it must be satisfied firstly that the affairs of the company are being conducted in a manner oppressive to any member or members; secondly that the facts would justify the making of a winding-up order on the ground that it is just and equitable that the company be wound up and thirdly that a winding-up order would unfairly prejudice the applicant or applicants.

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