With the experience of looking at the litigation before the Company Law Board and the Company Court, with the privilege of looking at various judgments under the provisions of Companies Act, 1956 while writing a commentary on Company Law and with what I have heard from few shareholders when they have grievance against the Company or the majority, I would like to express my views on the dispute resolution mechanism under the provisions of Companies Act, 1956.

We all know that the new Company Bill is still pending and still awaiting to get the required assent and from the media reports it is very clear that it will take more time to the new Companies Act in the place of present Companies Act, 1956.

Yes, some of short falls in the Companies Act, 1956, have been taken care of in the new Companies Bill. For example, we may not be able to find an express bar on the jurisdiction of other Civil Courts in the Companies Act, 1956 and there are precedents supporting the simultaneous proceedings and also precedents like disputed facts can not be gone into by the Company Law Board which follows summary procedure. There is a specific provision in the new Companies bill like section 34 of SARFAESI Act that the Civil Court should not interfere or assume the jurisdiction of National Company Law Tribunal under the proposed new Act.

In view of the fact that it will take further more time to see the new act, I would like to express my views on the dispute resolution mechanism under the provisions of Companies Act, 1956. A dispute in a company can be like:

(a) A dispute between a Company and an outsider.

(b) A dispute between a Company and any of its members.

(c) A dispute between majority and minority in a Company.

Before going to look at the company disputes and the adjudication mechanism under the provisions of Companies Act, 1956, I would like to deal with another issue having close connection to the topic under discussion.

Companies are two kinds broadly viz., private limited companies and public limited companies. Again there are closely held public limited companies and the listed public companies. The difference between private and public limited company is as follows:

(1) Share transfer is restricted in private limited companies and there can not be any such restriction in public limited companies.

(2) The provisions of the companies act and other rules govern the functioning of the public limited companies and it is not the case in case private limited companies as such.

(3) Private limited companies enjoy more privileges even under the Act as compared to public limited companies and the private limited companies can have its own regulations in the course of its functioning.

(4) Public companies can be closely held when the entire shareholding is held by the members of the family and its opposite is listed public companies.

(5) When we look at the issue of listed public companies, the SEBI will take care of the interests of the shareholders and the listed public companies should comply with many SEBI and central government regulations.

One thing is clear that the interests of the shareholders are more protected in case of listed public companies and it may not be so in case of private companies and the closely held public companies.

As such, the issue of adjudication and mechanism is to be looked into from the point of view of private companies or the closely held public companies.

Now we look at the issue of disputes as referred to above and its adjuratory mechanism:

(a)          A dispute between a Company and an outsider: There can be disputes between a company and an outsider like creditors. There can be a business agreement between the Company and an agency or another company. When it is a dispute between a Company and an outsider, the outsider can approach the traditional civil courts seeking for enforcement of his/their rights or damages and simultaneously, they can approach the High Court seeking to wind-up the Company on the ground that the Company is not in a position to pay its debts or there exists a reasonable ground to wind-up the Company. There are many principles and procedure governing the issue of winding-up. The High Court may not automatically wind-up the Petition on presentment in view of the interests of other shareholders and stake holders who may not raise their voice before the Court or who may not even have the knowledge of winding up proceedings. Thus the High Court will take care of the interests of the other shareholders or stake holders when a petition is filed by an outsider like creditor seeking winding-up. Yes, it is true that the realization of money or claims after the company is liquidated is complicated exercise and it is a big subject to deal with and the proposed new companies act may deal with it also.  When it comes to the issue of dispute between the Company and an outsider before a traditional civil court, the proceedings before a civil court may not affect the company as an entity in most cases and it is like determination of rights and liabilities of the parties before it. Thus, there may not be any problem when there is a dispute between the Company and an outsider.

(b)         A dispute between a Company and any of its members: There can be disputes between the Company and any of its members who may not qualify to present an application for winding-up before the High Court and qualify to file an application under section 397/398 of the Companies Act, 1956. In such a case, the option available to the member is to approach the traditional civil court or to complaint to the Registrar of Companies or Central Government or the Company Law Board as the case may be. There is effective remedy to a member against the Company as I feel.

(c)          A dispute between majority and minority in a Company: When there are disputes between majority and minority in a Company, it becomes very very complicated. These differences between the majority and minority may lead to presentment of an application under section 397/298 of the Companies Act, 1956 alleging some oppression and mismanagement, or presentment of an application under section 234 of the Act seeking an investigation into the affairs of the Company or presentment of a winding-up petition before the High Court.  We will see the disputes between majority and minority very frequently in family companies, private companies or even in closely held public companies. Stakes in any company will be very high and any delay in preventing the illegality in a Company will cost more to a minority. The majority may be selling all the properties of the Company undervaluing the same, the majority may dilute the shareholding pattern and the majority may completely run the company as if it is a proprietorship concern and anything can happen. The provisions of the Companies Act, 1956 confers rights on every shareholder and special protection is given to the minority group in a company. If the minority can not effectively agitate their grievance or not able to get the remedy even if their case is established, then, it is certainly a bad thing and against the theme of company law. There are many issues to discuss in this connection. A minority shareholder may not have simultaneously knock both the Company Law Board and also Civil Court at times as there are precedents that disputed facts can not be gone into by the Company Law Board which follows a summary procedure. For example, there is some sale transaction between a majority in a company and outsider wherein the company sells the substantial portion of its assets. If such a sale transaction is challenged, it is very difficult to get the preventive orders or getting the sale set-aside speedily on the precedent as referred to. Apart from this, there are precedents like Company Law Board has no jurisdiction to punish the contemnors and only the High Court can punish the persons who have committed contempt of the orders of the Company Law Board and it all definitely delays the adjudication process. There is need to make the dispute resolution between the majority and minority more effective than present and we may need many new principles and also practice.

Authored By:

Mr. V.Durga Rao, Advocate, Madras High Court

Email: vdrao_attorney@yahoo.co.in

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