It is true that the Board of directors in a Company is supposed to act in the best interest of the Company as they are answerable to the Share-holders and submits a report in the Annual General Body Meeting (AGM). In every Company, normally, the majority in the Board consists of the representatives of the majority shareholders though it is a best corporate practice to give proportionate representation to the minority and also to have some independent and expert directors on the Board. The set of rules and regulations to be followed by a Company depend upon its kind as to whether the company is a Private Limited Company or Public Limited Company. While public limited companies are regulated by the provisions of the Act, the listed public companies are regulated by the provisions of the Companies Act, 1956, the SEBI regulations and guidelines and also the obligations committed to the Stock Exchanges as required in the listing agreement. Depending upon the size and nature of the Company, a Company may have to involve in many transactions day-to-day and these corporate may follow some practices which are not, at times, have the legal sanctity. The Directors in a company are privy to all the information and the secrets of the Company while it is true that the Directors are not above the law and they are supposed act only in accordance with law irrespective of the interests of the members and the Company.

If we look at the ground reality, there tend to be certain corporate practices, which can be construed as mis-management in general sense. Using the knowledge of corporate secrets and all the transactions, a minority group may try to create problems to the majority in a Company by approaching Company Law Board under section 397/398 of the Companies Act, 1956.  A minority can be successful in many cases to establish an act of mis-management against the majority under section 397/398 of the Companies Act, 1956.  But, in order to get the relief under section 397/398 of the Companies Act, 1956, the act of oppression and mismanagement is to be looked into as to how to the provisions of section 397/398 are to be construed in the light of precedents laid down by the Constitutional Courts from time to time.  Dealing with a petition under section 397/398 of the Act would be very complicated in my opinion and the Board may have to consider so many issues before granting relief to the Petitioners or the minority. In my opinion, the following points are very important while dealing with section 397/398 of the Companies Act, 1956.

Points for consideration:

  1. Section 397/398 of the Companies Act, 1956 meant to provide a relief to the minority shareholders who are qualified under section 399.
  2. It is very difficult to define the acts of “oppression” and mismanagement” and those acts are to be “harsh, burden some and wrong” as reiterated from the courts from time to tome.
  3. Like oppression and mismanagement, it is also difficult to conclude as to which acts can be construed as “harsh, burden some and wrong”.
  4. The Company Law Board may have to look into various facts alleged and countered and also the law, while providing relief to the Petitioners under section 397/398 of the Companies Act, 1956.

What happens in some cases is that the minority group will take advantage of the privileged information in the Company and use the same with ulterior motive by alleging oppression and mismanagement and by seeking relief under section 397/398 of the Act. When there is a proof of mis-management, it would be very difficult for Company Law Board to come to a conclusion and pass relief. But, in my opinion, it is not sufficient to establish an act of mismanagement against the Company or the majority and such acts will not automatically give rise to the minority to get relief under section 397/398 of the Companies Act, 1956. In every Company, depending upon their size and the volume of transactions and exposure, there tend to be problems and if every problem is cited from the minority against the majority as an act of mismanagement, the same can not be accepted. As the object of section 397/398 of the Companies Act, 1956 is to provide relief to the minority against majority, the minority’s participation in the alleged acts of mismanagement are also to be looked-into and the minority can not take advantage of technicalities and make use of their privileged information under section 397/398 of the Companies Act, 1956 with ulterior motive. No one is allowed to take advantage of their own mistakes. It is a very complicated point to deal with.

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The recent judgment of the Supreme Court of India in SPECIAL LEAVE PETITION NO.9110 OF 2008, between Incable Net (Andhra) Limited & Others Vs. AP Aksh Broadband Ltd. & Others, is very important in my opinion and the important paragraph of the judgment is as follows:

“39.We are unable to understand as to how the decisions in the above case are of any help to the Petitioners, since nothing concrete has been established by them in regard to either oppression or mismanagement by the Respondent No.5 as far as the Petitioners are concerned. On the other hand, the conduct of the Petitioner No.2 provides a different picture since at the relevant point of time he was at the helm of affairs of the Respondent No.1 Company, despite being a Director on the Board of the Petitioner No.1 Company. The decision in V.S. Krishnan’s case (supra) is more apposite to the facts of the case. Quoting Halsbury, this Court observed that the expression “oppression” within the meaning of the Sections 398, 399 and 402 of the COMPANIES ACT had been interpreted to mean that the conduct of the majority shareholders towards the minority shareholders was harsh, burdensome and wrong and that such conduct was mala fide and was for a collateral purpose which would result in an advantage for some shareholders over others, although, the ultimate object might be in the interest of the Company. However, the facts disclosed in this case do not establish such conduct on the part of the Respondent No.5. Until the conduct of the majority shareholders was found to be oppressive in terms of the above description, under Sections 397 and 398 of the COMPANIES ACT, 1956, the Company Law Board was not competent to invoke its jurisdiction under Section 402 of the said Act to set right, or put an end to such oppression.”

Note: the views expressed are my personal and am aware of plethora of complications under section 397/398 of the Companies Act, 1956.

Author:

V.DURGA RAO, Advocate, Madras High Court.

Email: vdrao_attorney@yahoo.co.in

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