How to ascertain ‘oppression’ under section 397 of Companies Act, 1956?

The study of various judgments of High Court and Supreme Court under section 397/398 of Companies Act, 1956 speak volumes about the complications in dealing with the cases of ‘oppression and mismanagement’ under section 397/398 of Companies Act, 1956. There were many judgments under section 397/398 explaining the powers of Company Law Board, meaning of ‘oppression’, powers under section 402, the powers of Company Law Board in passing orders under section 402 in order to regulate affairs of the company in future, the responsibility of the board to hear all the necessary parties to the proceeding, the issue of public interest, the issue of dead-lock, the issue of applying the principles of partnership in closely held private companies, the scope of section 399, the issue of granting ‘consent’ by members, the issues of maintainability and the procedure to be followed by the Company Law Board etc. In my opinion, the law governing section 397/398 is clearly understood though facts in most of the cases complicate the exercise of the Company Law Board in passing appropriate orders or orders to regulate the affairs of the Company. If the procedural part and the execution part are well addressed, then, I think the remedy before Company Law Board for the minority shareholders against oppression by majority can really be useful and effective. The remedy should be effective and speedy in view of the stakes involved in many cases. While in some cases, section 397/398 of the Companies Act, 1956 is being misused, in some cases, the real grievance of the minority is being side-lined on technicalities as some may feel. While the law laid-down by the Constitutional Courts becomes binding precedent on a particular point or the subject, in my opinion, the Company Law Board can pass any orders under section 397/398 and section 402 of Companies Act, 1956 based on facts and circumstances of the case with the intention of regulating the affairs of the Company and putting an end to the matters complained of finally. There can not be any hard and fast rule when it comes to construing ‘oppression’ and it depends upon the facts and circumstances of the case. A company may not be adhering to the required corporate practice, but, it could not have really practiced the acts of oppression and mismanagement. A company may be well adhering to the corporate practice through minutes, registers, filing documents with the Registrar of Companies (ROC) and still it might have indulged in serious acts of oppression and mismanagement. In all cases under section 397/398 of the Companies Act, 1956, the parties concerned should provide all the necessary evidence through affidavits and should ensure proper representation before the Company Law Board from time to time. Because, it would be difficult for the Company Law Board to review things from the voluminous records and it is more so with the transfer of presiding officers. Despite the expectancy of speedy disposal of cases and effective orders from time to time in order to regulate the conduct of the affairs of the Company and to safe guard the interests of the members, due to certain inevitable difficulties, the proceedings may get unreasonably delayed. Dealing with a case of oppression and mismanagement is really a tough job and there would be lot of concealment by the parties concerned in many cases.

There were many judgments as to how the word ‘oppression’ under section 397 of the Act is to be construed. It is settled that to construe an act as ‘oppressive’, it should be harsh and burdensome and it is being constantly referred and settled. Again, only based on facts, it can be construed as to whether a particular act of the majority is ‘harsh’ or ‘burdensome’.

Dealing with the issue as to how to ascertain or construe ‘oppression’ in a proceeding under section 397/398 of Companies Act, 1956, the Hon’ble Calcutta High Court in Bagri Cereals Pvt. Ltd Vs. State, 1998 (98) CalWN 617, was pleased to observe as follows”

“Incidentally it is to be noted that in a petition under Section 397 of the Act it is left to the Court to decide on the facts of each case as to whether there exists any oppression which calls for action. There is statutory definition of what oppression is but the fact remains it must be shown that the conduct is oppressive and the events shall have to be shown in such a manner so as to evince a consecutive set of facts which would render the Court to come to a conclusion that the company is being conducted in a manner oppressive to some members of the company. The conduct shall have to be burdensome, harsh and wrongful. It is now well settled principle of law that isolated act by itself may not support the inference that there was a malafide intention or that the act can be termed to be as such oppressive or burdensome. It is further to be noted that a mere lack of confidence would not bring home the charge of harsh and wrongful act neither it can conclusively prove an oppression of a minority by the majority. There must be an existing element of lack of probity or fair dealing to a member in the matter of his rights as a shareholder.

There cannot be any manner of doubt that the petitioners were oppressed by the respondent, who formed the majority group in the company. No hard and fast rule can be laid down as to what will amount to oppression. Oppression cannot be defined but the same depends upon the facts and circumstances of each case. It shall have to be dealt with as a whole and it is the bounden duty of the Law Courts to see for itself as to whether any oppression or mismanagement has been committed or taken place within the meaning of Sections 397 and 398 of the Companies Act. In the event, the Court comes to a conclusion in the affirmative, upon consideration of the same, there ought not to be any hesitation in the matter of passing appropriate orders so that the matters complained of are brought to an end and justice is done between the parties.

Various other authorities have been cited from the Bar, but in my view, whether oppression or mis-management have taken place shall have to be ascertained from the facts and circumstances of each and as such, I need not deal much on that score.”

As such, a serious of irregularities may not be construed as ‘oppression’ under section 397/398 of Companies Act, 1956 and few isolated events too at time, may be construed as ‘oppression’ and appropriate orders may be passed. A proceeding under section 397/398 of the Companies Act, 1956 is really complicated and it is more so when the Company is a going concern and where there are many interested parties. Though, we can rely on many observations of Constitutional Courts from time to time, the relief in a Petition under section 397/398 of Companies Act, 1956 will depend upon the facts and circumstances of the Case. But, the precedent of Constitutional Courts and discussion on the subject gives a clear idea as to the object of section 397/398, the responsibility of Company Law Board and the complications.

Note: the views expressed are my personal and a view point with all respect to the authorities and courts.

Author:

V.DURGA RAO, Advocate, Madras High Court.

Email: vdrao_attorney@yahoo.co.in