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The procedure prescribed in Company Law Board regulations is not too technical like the provisions of Civil Procedure Code, and the procedure is based on the logic and reason. I did personally feel that even the Company Law Board normally do not rely on technicalities and I personally feel that substance is to be looked into over technicalities by the Company Law Board in a petition under section 397/398 of the Companies Act, 1956.
The provisions of Companies Act, 1956 makes it very clear that every company should maintain proper books of accounts and should record all the transactions of the Company pertaining to sales, purchases, expenses, receipts, liabilities and Assets. Not only recording the transactions, every Company is also supposed to maintain the documentary proof in support of the transactions as per law.
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.
If a petition under section 397/398 of the Companies Act, 1956 is based on a Share Purchase Agreements and its validity, then, despite the pendency of a civil dispute or arbitration proceeding simultaneously, the proceeding under section 397/398 becomes so complicated and dealing with issue is really challenging. I would like to present a case study with typical facts. The analysis and my opinion on the issue follow the presentation of facts.
We can find so many judgments of Constitutional Courts on section 397/398 of the Companies Act, 1956 and the courts have ruled and maintained some principles as to how the provisions of section 397/398 of the Companies Act, 1956 are to be interpreted. I feel that despite the settled legal principles, the facts of each case to be carefully gone into in a petition under section 397/398 of the Companies Act, 1956 and many directions or orders are passed based on facts.
I was of the opinion that the technological advancements and the schemes like MCA providing for on-line corporate filing, will be of help to the corporates. I was also of the opinion that the MCA scheme will also boost the pace in which the companies are being incorporated in India. There is a positive side of MCA scheme providing for speedy and risk-less corporate filing, however, I want to now focus on the negative issues of MCA scheme and as to how the scheme is being misused.
I have been writing articles continuously on section 397/398 of the Companies Act, 1956 touching complicated and interesting areas as I feel. I am of the strong opinion that for good corporate growth, the law governing corporates or the companies should be clear and there should be an “effective redressel mechanism”.
It is a fact that it is very rare to see a petition by a group of minority or majority under section 397/398 of the Companies Act, 1956 in listed Public Companies. As everybody knows a Company needs to get qualified as per SEBI (DIP) regulations and should satisfy other requirements before getting its shares listed over a stock exchange.
Law governing the rights of the minority, the propriety of the majority and the protection given to the shareholders under section 397/398 of the Act, is always very interesting and also complicated. There are many interesting and complicated issues under section 397/398 of the Companies Act, 1956.
As we all aware, section 397/398 of the Companies Act, 1956 deals with oppression and mismanagement and the protection to the minority against the majority. The law makers could not have expected that a situation will come where a majority are harassed or oppressed by the minority. Sections 397/398 and other connected provisions of companies act, 1956 meant to provide relief to the minority shareholders against the majority when minority are oppressed or the property of the company is mismanaged.
