Is relief under section 397/398 of the Companies Act, 1956 effective?

A brief about section 397/398:

        Section 397 and 398 of the Companies Act, 1956 deals with “oppression” and “mismanagement” by the majority in a Company against the Minority Shareholders. How to construe “minority” for the purpose of section 397/398 is dealtwith under section 399 which prescribes qualification to approach the Company Law Board under section 397/398 of the Act. What amounts to “oppression” and is oppression completely different from “mismanagement” as dealwith under section 398; is another interesting issue to look into. Oppression is nothing but preventing the shareholders in getting their rightful share in the company’s profits and securing the respective rights in a Company. If the majority does anything with the motive of dominating or oppressing the minority, then, such an act can be construed as “oppression”. Normally, the oppression starts with the dilution of shareholding by fresh issue and with such an act, at times, the majority goes into minority in a Company. Mismanagement is nothing but not managing the company in accordance with rules and law and resorting to illegality in the course of management. It is very very difficult to see “oppression” and “mismanagement” as two different issues at times and that is the reason why we see the mentioning of both 397 and also 398 in an application by the minority against the majority before the Company Law Board alleging misdeeds and prevention of mismanagement by the Company. But, at times, the “oppression” can be different from “mismanagement”. The majority may only be interested in oppressing the minority and may not have intention to mismanage the company’s properties.  However, the issue as to whether “oppression” is different from “mismanagement” remains academic most of the time.

Adjudication and complications:

        Company Law is very very complicated in view of the rights of various shareholders, the set-up and especially the interests of the creditors. At times, the Courts and also the Company Law Board may not apply the rules and regulations without a thorough enquiry and the enquiry and the need of caution to be exercised consumes some time and it delays the process of adjudication at times. For example, a winding-up application can be filed by the creditors when the Company fails to discharge its liability even after the receipt of statutory notice and it is a ground to wind-up the company on the assumption that the Company is not financially sound and not in a position to pay its debts. But, in reality, this will not happen and the Courts discharge its burden of looking into various other issues in the interests of the shareholders and other creditors.

        We have only few listed public companies and the public companies with the motive of open participation; and most of the companies are either private companies or family companies, or closely held public companies. When it comes to the issue of widely held public companies and listed public companies, there may not be much problem. With wider participation and frequent transfer of shares, there will be very good balance in widely held public companies and listed public companies. SEBI plays a commendable role in ensuring that the listed public companies functions in accordance with the rules, regulations, law and the norms. As such, we see many internal disturbances in private limited companies or closely held public companies.  Thus, it is very very essential to ensure proper functioning of closely held companies as otherwise, there will be a slowdown in industrial growth logically and the people may not be interested in investing in any company. How to ensure the proper functioning of closely held companies; is an important issue to be looked into. It can be ensured with good law or regulations and also the effective implementation of laws.

        The Central Government discharges quasi-judicial functions while entertaining certain applications by the Company and the shareholders under the Act. The Company Law Board is a special forum under the Act to be an adjudicator and granting authority at times in the interests of the Company or the shareholders. For variety of purposes, a Company or the shareholder may approach the Company Law Board, but, the most significant is approaching the Board alleging oppression and mismanagement in a Company under section 397/398 of the Companies Act, 1956. There is a need of giving protection to the rights of the shareholders and it should be effective.

Nature of powers:

        The nature of powers exercised by the Company Law Board under section 397/398 is preventive and the pre-requisite for approaching the Board under section 397/398 is that the “oppression” or “mismanagement” should be continuous and subsist at the date of presenting the application. It is settled position as I think. Though, the language used under section 397/398 and section 402 appears to have given wider powers to the Company Law Board, there exist many limitations. The procedure before the Company Law Board should be very clear and there should be any reference to “summary procedure” and “trial”. The Company Law Board should not face a situation where it says to adjudicate a particular thing in an application under section 397/398 of the Act a comprehensive trial is required. Again, the orders of the Board are to be implemented in letter and spirit and there should be a strict regulation for speedy disposal of matters and giving reason for granting adjournments.

Issues:

        It is true that the new Companies Bill sought to address some of the vital drawbacks in the present Companies Act, 1956 and we need to wait and see the functioning of proposed National Company Law Tribunal.

        Important issue to be addressed under section 397/398 is as follows:

1. It is to be re-looked as to whether it is proper to confine the Board to pass only preventive measures under 397/398 of the Act and whether the remedy before the Board under section 397/398 can be effective with limited powers.
2. The procedural technicalities to be dealwith specifically and the technicalities should not delay the adjudication process in an application under section 397/398 of the Act.
3. The Company Law Board should be given wider powers to get its orders implemented or executed in letter and spirit.
4.  There should be a specific strict regulation preventing the delay before by the Board in an application under section 397/398 of the Act.

Conclusion:

It is true that the Company Law Board discharges its functions effectively with the given powers and legal back-up despite the administrative reasons; the Board can be more effective if wider powers are conferred and it is, for sure, an important issue for the growth of corporate world or the industry.