Category: National Company Law Tribunal

Transition from High Court to NCLT, compromise, arrangement, winding-up and other matters

The Insolvency and Bankruptcy Code, 2016 (31 of 2016)

 

Key words of Preamble to the Insolvency and Bankruptcy Code, 2016 (IBC):-

  • reorganization and insolvency resolution of- corporate person, partnership firms and individuals

– in a time bound manner

  • for maximization of value of assets
  • to promote entrepreneurship

  • availability of credit

  • balance the interest of all the stakeholders (including alteration in the order of priority of payment of Government dues)

  • to establish an Insolvency and Bankruptcy Board of India (IBB or IBBI)

 

What happened and when:

 

Date What
28/5/2016 IBC notified
05/08/2016 IBB related provisions notified
19/08/2016 Provisions empowering CG notified
29/08/2016 Salary Rules notified
01/10/2016 IBB established with office at New Delhi

Mr. M. S. Sahoo Chairperson

Ex-officio of Ministry of Finance, Ministry of Corporate Affairs, Ministry of Law and Justice and the Reserve Bank of India notified

01/11/2016 Provisions empowering IBB notified.

Also, Schedules to IBC notified – change in Central Excise, Service Tax, SICA

15/11/2016 Regulations for IPA and IP notified

Also, Schedules to IBC notified – change in SARFAESI, LLP Act 2008, Companies Act 2013, Payment and Settlement Systems Act, 2007

21/11/2016 IBBI (IPA) Regulations 2016 notified w.e.f. 21/11/2016
23/11/2016 IBBI (IP) Regulations 2016 notified w.e.f. 29/11/2016
30/11/2016 Ss. 4 to 32 – Provisions relating to Insolvency Resolution Process for Corporate Persons notified w.e.f. 01/12/2016

S. 236 Offences under IBC, triable by Special Court under CA 2013 – notified w.e.f. 01/12/2016

S.237 IBC overrides all other laws – notified w.e.f. 01/12/2016

S.231 No injunction notified w.e.f. 01/12/2016

S.239(2)(a) to (f) – CG to make Rules for application to NCLT

IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 notified w.e.f. 01/12/2016

01/12/2016 Ss. 4 to 32 of IBC notified (except for individuals, partnership firm and voluntary liquidation)

S. 60 transitory – for Court to NCLT for Personal Guarantor

01/12/2016 IB (Application to Adjudicating Authorities) Rules, 2016 notified

For filing applications u/s.7,8,9 of IBC

   

 

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

 

As you might be aware that the Government of India has notified the substantive provisions of the IBC with effect from 01 December 2016. The Government has also issued notifications for repeal of the Sick Industrial Companies (Special Provisions) Act, 1985 (the ‘SICA’). Thus, SICA is repealed with effect from 01st December 2016 and all proceedings, reference, inquiry or appeal before BIFR and AAIFR stands abated with effect from 01st December 2016.

 

Further with effect from 01st December, 2016, all matters relating to winding-up (except voluntary winding-up) of Companies and Limited Liability Partnerships (LLPs) are dealt with by the NCLT. Thus, High Courts (and in some part of the Country District Courts) do not have jurisdiction for dealing with new cases of winding-up on and after 01 December 2016. Cases of Voluntary winding-up to be dealt with by the NCLT on and after 01 April 2017.

 

Further, with effect from 15th December, 2016, cases relating to compromise, arrangement and reconstruction (including merger, amalgamation and demerger), reduction of share capital, variation of shareholder’s rights, recovery of property of company in wrongful possession of employees or ex-employees of Company etc. would be dealt with exclusively by the NCLT.

 

To have birds eye view of the transitory provisions for transfer of cases from High Courts to the NCLT, a tabular presentation is given below:

 

TRANSITORY PROVISIONS

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

National Company Law Tribunal (NCLT).

 

Section 434 (1) (c) of the Companies Act 2013 – as amended by Eleventh Schedule of IBC and further amendment by Order S.O. 3676(E) dated 7th December 2016.

 

Subject Matter Transferred to NCLT Retained with High Court
Winding-up under supervision of Court No. Yes.
Voluntary winding-up (Sec.484 of CA 1956)

(Rule 4)

No.

New cases to be filed with NCLT w.e.f. 01 April, 2017 as per the IBC.

Note that provisions relating to voluntary winding-up under the Companies Act, 2013 are omitted by the IBC.

 

Yes, for cases filed upto 31st March 2017.
Winding-up for inability to pay (Sec. 433(e) of CA 1956)

(Rule 5)

Yes, where petition has not been served on the Respondent.

Such petition to be treated as application u/Ss. 7, 8 or 9 of IBC.

Petitioner to submit additional information, including proposed insolvency professional, within 60 days from date of notification of the Rules on 07 December 2016. Thus, by 05 February, 2017. Failing which petition shall abate.

Yes, where petition has been served on the Respondent
Winding-up by Court

[Sec. 433(a) and (f)]

(Rule 6)

Only those cases where the petition has not been served on the respondent. Yes, where the petition has been served on the respondent.
BIFR u/s.20 of SICA

[S. 434(1)(d) of CA 2013 r/w Rule 5(2)]

w.e.f. 01/12/2016 Sick Industrial Companies (Special Provisions) Repeal Act, 2003 brought to force, including section 4(b) thereof.

No.

 

Proceedings before BIFR and AAIFR abates.

However, reference within 180 days can be made to NCLT as per Companies Act 2013.

Yes, where opinion has been forwarded by BIFR and no appeal is pending and winding up is initiated u/s. 20 of SICA.
Arbitration, Compromise, arrangement and reconstruction

(Second proviso to Section 434(1)(c) of CA 2013 read with Rule 3)

Yes, except those cases reserved for orders for allowing or otherwise, i.e. final disposal (cases heard but orders reserved) w.e.f. 15th December, 2016 Those cases reserved for orders for allowing or otherwise (Cases heard and pronouncement of order is pending or reserved) w.e.f. 15th December, 2016
Reduction of Capital (Sec. 100 of CA 1956 – corresponding Sec. 66 of CA 2013) As above As above
Cancellation or variation of rights of shareholders (Sec. 106 of CA 1956  –corresponding sec. 48(1) of CA 2013) As above As above
To restrain fraudulent persons from managing companies (Sec. 203 of CA 1956) As above As above
For order that affairs of a Company ought to be investigated (Sec. 237 of CA 1956 – corresponding sec. 213 of CA 2013) As above As above
Applications under section 439 for the winding-up of a company, or under section 583 for the winding up of an unregistered company, or under section 584 for the winding-up of a foreign company

(Corresponding Sec.376 of CA 2013)

As above As above
Applications for a declaration under section 542 (XI Schedule) in the course of proceedings under section 397 or 398 that a person who was knowingly a party to carrying on business in a fraudulent manner shall be personally liable for all or any of the debts or other liabilities of the company

(Corresponding Sec.339 of CA 2013)

As above As above
Applications by a creditor or member under section 543 (XI Schedule) in the course of proceedings under section 397 or 398, to enquire into the conduct of any of the persons mentioned in section 543 (XI Schedule) and compel him to repay or restore any money or property to the company or pay compensation.

(Corresponding Sec.340 of CA 2013)

As above As above
Applications under section 633(2) by an officer of a company for relief.

(Corresponding Sec.463 of CA 2013)

As above As above
Applications under section 560(6) to restore a company’s name to the Register of Companies

(Corresponding Sec.248 of CA 2013 – does not contain similar provision)

As above As above
Applications under section 579 to confirm the alteration in the form of the constitution of a company by substituting a memorandum and articles for a deed of settlement.

(No corresponding provision under CA 2013)

As above As above

 

All proceedings transferred from High Court to NCLT, to be dealt with as per the Companies Act, 1956 and the Company (Court) Rules, 1959. [Third proviso to Section 434(1)(c) of the Companies Act 2013].

All proceedings transferred from High Court to NCLT, to be dealt with from the same stage as were before their transfer. [Section 434(1)(c) of the Companies Act 2013].

Can Company Law Board stay its own proceedings?

Issue: Can Company Law Board stay its own proceedings?

Held: yes.

Agarwalla & Ors. V. Castron Mining Limited & Ors. (2012) 173 Comp Cas 117 (Cal)

Appeal Dismissed.

 

Sections 397 and 398 proceedings were filed by the appellant before the Company Law Board (CLB) on grounds of oppression.

An interim order was passed by CLB on 8.5.2007 restraining the respondents from using the name of the Company or acting on its behalf.

Respondent made an application to CLB for vacating the interim order. CLB by order dated 17th April, 2009 stayed the proceedings before it till disposal of the Title Suit filed in Alipore Court.

Appellants aggrieved by the stay and preferred an appeal to High Court under section 10 F of the Companies Act, 1956 contending, inter alia, that CLB cannot stay it’s own proceedings.

Appellants contended that:

(1) As mere filing of the suit cannot be a ground for stay of the proceedings under Sections 397 and 398 of the Companies Act, therefore the CLB ought not to have stayed its proceedings, especially as there is no prospect of the suit filed being decided as till date no writ of summons has been served.

(2) The stay granted is under Section 10 of the CPC which does not empower the Tribunal to stay its proceedings as Section 10 is not to apply to Tribunals.

(3) By virtue of Section 10 of the CPC trial of a suit can be stayed but as the requisites of Section 10 has not been satisfied therefore the proceedings before the CLB could not have been stayed and the reason for staying the proceedings is based on an incorrect conclusion. The identity must be complete as also the subject matter and the parties. In the Title Suit, there are 150 defendants, therefore for lack of identity of subject matter or parties as held in Adhish Chandra Sinha vs Hindusthan Gas & Industries Ltd. ((AIR 1985 Cal. 154; 1984 SCC OnLine Cal 145)) there has been illegal exercise of powers as the CLB has indefinitely stayed the proceedings filed before it.

(4) When the conditions of Section 10 is not fulfilled, there can be no stay as Section 151 is not to apply as held in Manohar Lal Chppra v. Rai Bahadur Rao Raja Seth Hira Lal ((AIR 1962 SC 527: 1962 Supp (1) SCR 450)) and CLB could not have stayed its proceedings.

Reliance has also been placed on Mental Health and Neuro Sciences v. C. Parameshwara ((AIR 2005 SC 242; (2005) 2 SCC 256)) and Guljarilal Kanoria and another vs. Loptchu Tea Company Ltd and others ((1999 SCC OnLine CLB 33 : (2000) 102 Comp Cas 292)).

(5) Regulation 44 is applicable to proceedings before CLB and therefore CLB could not have stayed its own proceedings by exercising power and in doing so the CLB has acted perversely. In fact in the Title Suit filed there is no order restraining the CLB proceedings, therefore the order dated 17th April, 2009, staying the CLB proceedings till disposal of the Title Suit, be set aside.

(6) Section 10 has no application, therefore the principles analogous thereto ought to be applied to prevent abuse of process. It is not known on what ground the CLB has stayed its proceedings no reason has been given for exercise of discretion. Identity of parties is not relevant, as admittedly there are two groups.

(7) There is no finding by the CLB that the proceedings is in abuse of process and the power has been exercised in the interest of justice.

(8) The Alipore suit is preemptive in nature and the interim order has been continued as PKA is running the mines, CLB should have proceeded with the 397 proceedings on equitable grounds, on considering that the Alipore suit is dormant.

(9) It is by applying the principles of res-judicata that stay of the proceedings has been granted. This is not a valid ground. In Lopchu Tea’s case the suit was active therefore the said decision is distinguishable so also Shorab Merwanji Modi vs Mansata Film Distributors ((AIR 1957 Cal 727)).

(10) By the order dated 19th March, 2010, in fact the Alipore suit in a revisional application has been stayed. Therefore stay of proceedings before the CLB be set aside.

(11) The discretion has been exercised on the basis of the Division Bench Order of 2005 and the decision of Lopchu Tea and such exercise not being proper renders the order dated 17th April, 2009 perverse.

Opposing the appeal, it was contended that:

(1) In the suit which has been filed the parties are the same as in the proceedings before the CLB.

(2) An application has also been filed under Order 1 Rule 8 of the Code of Civil Procedure, in the suit therefore the parties in the suit (defendants) and the parties in the CLB proceedings are similar. In fact the group can be identified in 397 proceedings which is not possible to do in the suit filed before the Alipore Court.

(3) The CLB is exercising powers under Section 397, which was previously vested in the High Court. Adhish Chandra Sinha vs Hindusthan Gas & Industries Ltd. so also Mental Health and Neuro Sciences v. C. Parameshwara are distinguishable on facts, as the issues were different. In fact the issues in the Title Suit and the CLB is the same. Manohar Lal Chppra’s case is distinguishable and it is incorrect to say that no steps has been taken in the suit. Reliance has been placed on Shorab Merwanji Modi vs Mansata Film Distributors. In fact by order dated 19th March, 2010 stay of Title Suit was directed.

(4) Section 397 read with Section 402 of the Companies Act expands the jurisdiction of the CLB and therefore reliefs though not prayed can also be granted to the Company by CLB.

High Court examined competence of the CLB to stay its proceedings.

Hon’ble High Court, considered that in the Alipore suit all the share-holders have been made parties. Leave under Order 1 Rule 8 CPC has also been taken whereby any share-holder omitted as a party will be entitled to apply for addition of party whereas all the parties in the suit are not parties before the CLB. The issue raised before the CLB is with regard to oppression of the majority by the minority whereas in the Alipore suit the share-holding of PKA group (the appellant) is under challenge. Once the said issue is decided the question of the share-holding and its oppression will arise.

It noted that Section 10 is not to apply to a Tribunal, but under Regulation 44 of the 1991 Regulation the CLB is empowered to stay proceedings before it when it finds that parallel proceedings are pending in another Court involving the same subject-matter and identical issues, even though the CLB proceedings is not an abuse of process. In proceedings before the CLB it has been admitted that one Mr. Modi and Mr. Upadhyay were appointed as Directors with the consent of the MKA group and at the meeting on 29.12.2004 the resignation of the MKA group was accepted. In the Title Suit the MKA group has sought for cancellation of the said meetings, so also the relevant forms filed with the Registrar of Companies.

In fact before the CLB, the appellants seek an investigation by the Tribunal into the correctness of the claim made by the MKA group. This issue is substantially and directly in issue in the Alipore Suit.

Similarly the appellants have sought cancellation of all statutory records filed by the MKA group. Similar prayer is sought by the MKA group in respect of the appellants. Therefore the issues are identical as rightly held by the Tribunal and the decision reported in Adhish Chandra Sinha vs Hindusthan Gas & Industries Ltd. is distinguishable in view of the above facts. Manohar Lal Chppra’s case and Mental Health and Neuro Sciences v. C. Parameshwara will also not apply in the said facts. Therefore the “judicial prudence” exercised by the Tribunal in view of Loptchu Tea Company’s case in staying its proceedings on the ground of substantial identity of subject-matter and of the parties so also the Title Suit being filed in 2005 and the CLB proceedings in 2007 i.e subsequent to the Title Suit and to prevent conflict of decision is based on sound principles and no interference is called for with the order dated 17.4.2009 in so far as it seeks to stay its proceedings till a decision is taken in the Title Suit of 2005.

It is true that the Title Suit has been stayed in Revision but steps can be taken to activate the hearing of the said application. Steps can also be taken in the Title Suit in accordance with law.

For all the aforesaid reasons, section 10F appeal was dismissed.

 

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.

Pending challenge of arbitral award, proceedings stayed by CLB

Pending challenge of arbitral award, proceedings stayed by CLB

Hotel Vellore Royal P. Ltd And Others v. P. V. Chandra Sekar And another [2010] 153 Comp Cas 214  CLB

Facts:

The case cited here falls under the  purview of section 397/398 of the Companies Act, 1956.

A family was associated with one hotel  company and they were the subscribers and first directors of the company. A dispute arose between them in carrying on this business of the company which was decided to be settled by arbitration. Parties came to a settlement and an settlement award was made. But in the meantime one of the members and his wife alleged mismanagement and misapplication of funds. The petition was resisted by the respondent on the ground that the award was passed and in which the concerned persons interest was highlighted.  An execution petition was filed before the District Court for enforcement of terms of award. Under regulation 44 of CLB regulations, 1991 read with section 10 of Code of Civil Procedure, 1908, the respondent sought for stay of further proceedings of the company petition.

Decision:

In regards to validity or enforceability of arbitration award, it falls under the executing court and not CLB. The grievances of the parties in the affairs of the company can be remedied depending on the final outcome of the execution proceedings and as per the inherent power of the Board vested under regulation 44 of CLB regulations, 1991. The proceedings of the company petition were stayed pending disposal of the execution petition on the file of the District court.

 

allotment of shares, appointment of Managing Director

Ashok Kumar And Others v. Shree Janki Cold Storage P. Ltd And Others [2010] 153 Comp Cas 222 (CLB)

In the above case there were three main issues before the Company Law Board (‘CLB’):

Whether allotment of shares can be made without proper application and notice of Board meeting not issued to all Directors?

Whether appointment of Managing Director was to be held null and void if notice not sent to all the directors?

Whether Annual General Meeting (‘AGM’) convened in accordance with the directions of CLB, the conduct of such meeting do not deserve to be given any credence?

Facts: In the case above petition is filed u/s 397/398 of the Companies Act, 1956.  The petitioner argued that the allotment of shares to respondents, appointment of respondent as Managing Director and appointment of respondent as director in AGM  were null and void.

The petitioners were the majority in the board of the company, and they came to knew about the allotment of shares at premium to respondents. Petitioners argued that this allotment was done to reduce them to minority.

The petitioners further argued that appointment of respondent as the Managing Director was also not valid as no notice of meeting was sent to directors.

The petitioner’s another issue was of AGM conducted under the directions of CLB and under the supervision of the special officer appointed, should not be considered as valid.

Decision: CLB observed that no money was received by the company from the allottees and the respondents did not furnish any details relating to the allotment made and no application for the allotment was made.  CLB held that no shares could be allotted without a formal application. No shares could be allotted as  the petitioners constitute majority in the board. The allotment of shares was accordingly to be cancelled.

Respondent did not produce any proof of having sent any notice of AGM, did not file form 32 in accordance with the prescribed period due to which is appointment is considered as null and void.

The AGM was convened and held in accordance with the directions of CLB, therefore the allegation of the respondents relating to conduct of the AGM is valid.

The petition is disposed of in the above terms.

interim order can be passed only in application

S.Krishnakumari and others v. G.Vijaylakshmi alias Brinda and Others, [2010] 153 Comp Cas 28 (Mad)

The Company Law Board (‘CLB’) procedure prescribed under regulation 17 of the Company Law Regulations, 1991 is mandatory in nature.

One of the directors had filed an application to be transposed as one of the petitioners. The CLB rejected this application as there was no identity of interest between the petitioners and the director. On a memo filed by the petitioners, The CLB deleted the name of the director from the arrays of parties. Respondents objected and filed an appeal before the High Court. They pleaded that interim order cannot be passed by CLB based on memo. They contended that  there was a statutory violation as the petitioners had filed a memo instead of of an application as contemplated under regulation 17 of  the Company Law Regulations, 1991.

The High Court held that in the memo filed for deletion, no reason was stated and the CLB granted relief merely for asking. Filing memo before the CLB is not maintainable under the Company Law Regulations, 1991. The CLB committed an error in entertaining the memo without an application and as such the CLB has violated sections 397 and 398 of the Act. As per section 403 of the Act, interim order can be passed only in applications. The memo filed in which order is passed, is not an application. Since there is a procedural violation, the CLB has violated the rules and regulations, which is a question of law coming under the purview of section 10F of the Companies Act, 1956, and therefore the company appeals are maintainable.

A division  bench of Madras court considered whether an order could be passed in violation of the statutory requirements and what is the effect of the said order in the decision reported in [2009] 151 Comp Cas 44 (Mad) ; [2009] 6 MLJ 56 (Kothari Industrial Corporation Ltd. v. Kotak Mahindra Bank Ltd.). It was held that ordering winding up of a company contrary to the statutory requirements and violation of mandatory requirements is illegal.

Appointment of Government nominee directors

‘The Company had invited deposits from the public but was unable to repay the matured deposits. Many complaints were made by the depositors to the company law board. The Company Law Board took cognizance of matter and formulated  a scheme and directed the company to pay to the depositors accordingly.

The company however, failed to adhere to the scheme Thereafter the Central Government filed a petition under section 408, read with 397 and 398. It was observed that the company had  made huge  investments in its associate companies. Also the company made provisions for its debtors without giving any logical reasoning and had even written off the debts. The amount of debtors also was wrongly represented by the company. The Company had made other violations and the books of accounts of the company were not maintained properly. The Central Government prayed for six government directors being appointed in the company. The CLB after considering the entire case partly allowed the central government application and ordered two central government directors be appointed to monitor and assist the company for a period of 3 years.

Morepen Laboratories Ltd. v. Union of India [2008] 83 SCL 204 (HP)

employment/directorial complaints

In Dr. Vinod K. Jain v. BSI India (P.) Ltd. (2007) 138 Comp Cas 483 (CLB)

In this case question arose – whether employment grievances or directorial complaints can be entertained in a petition under Section 397, read with section  398 of the Companies Act, 1956?

It was held that in a closely held family companies or companies in nature of quasi- partnership, if circumstances so warrant, even employment/directorial complaints of shareholders can be entertained by CLB under sections 397/398 of the Companies Act.

In this case the petitioner holding 5 percent equity shares in the respondent company filed the instant petition under section 397/398 alleging oppression and mismanagement in the company’s affairs. When the foreign shareholders/directors decided to take control of the company because of business potential of the company, petitioner apprehending his illegal removal filed civil suit seeking permanent injunction against foreign directors from removing petitioner which was pending. Petitioner filed instant petition under section 397/398 alleging that respondents, i.e  foreign directors/shareholders, were trying to remove him from directorship by unlawful means.

It was held that since substantive allegation in petition related to removal of petitioner as managing director and on basis of said issue petitioner had already filed civil suit prior in time which was pending, he could not prosecute a parallel proceeding on same issue before Bench and, consequently, instant petition was to be dismissed.

Recall CLB Order

In N. Devendra Kumar Gupta  v. Picnic Park Hotels (P.) Ltd. (2008) 142 Comp Cas 253 (CLB)

A petition for oppression and mismanagement under section 397/398 of the Companies Act was filed with the Company Law Board (‘CLB’). The CLB, however, by an order stayed the proceedings till the disposal of the civil suit pending between the parties. Later on, the petitioner filed instant application to recall the impugned order on several grounds.

As the order in question having become final, only remedy open to petitioner was to prefer an appeal under section 10F of the Companies Act, 1956 which had reportedly been filed before High Court and therefore, petitioner could not seek to recall impugned order.

It was held that the prayer for recalling the common order did not survive and, accordingly, stood rejected.

Jurisdiction of the CLB

This Supreme Court judgement on oppression and mismanagement examined, inter alia, role of the Company Law Board (CLB) in cases of sections 397/398 of the Companies Act 1956.

Honorable Supreme Court observed that jurisdiction of the CLB is wide and can grant diverse reliefs to keep the company functioning and beneficial to shareholders.

In the case, there were two directors and two shareholders. Animosity arose between them. Apex court observed that it naturally affects functioning and management of affairs of the company. None of them willing to appoint additional director. Thus there existed dead lock. Under circumstances, the CLB directed the applicant to purchase shares held by respondent at a value to be determined by a chartered valuer. On appeal the High Court came to the concurrent finding that there was no mutual trust and confidence between the parties and it was impossible to run the company smoothly and upheld ruling of the CLB.

While considering Special Leave Petition, the apex court observed that, what may not be permissible for the affairs of a public limited company or even in a private company having large number of shareholders and directors, may be permissible in the case of this nature, where a company, for all intent and purport, is a quasi-partnership concern. Further, it stated it is necessary to take a holistic approach of the matter. The Parliament, while enacting a statute, cannot think of all situations which may emerge in giving effect to the statutory provision. The principle of ‘just and equitable clause’ is essentially equitable consideration and can be applied in this nature of cases. Relying on the English case law, it was observed by the apex court that principle applied in winding up of companies that “what is important is not the interest of the applicant but the interest of the shareholders of the company as a whole”, can be applied in a case under section 397 of the Act, subject to applicability of the well known judicial safeguards.

M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja [2008] 83 SCL 451 (SC).