We have been seeing tremendous corporate growth in India in the recent past and it can be attributed to the liberalization policy, growth of service sector and computerization/simplification of corporate filing through MCA scheme etc. The advantage of incorporating a company and do business is its liability factor. The liability of a member/shareholder for the losses sustained by the Company is limited to the extent of his shareholding and exception can be invoked by lifting the corporate veil. Again, the scope of expansion of business is so much when a company is incorporated rather a partnership firm or a proprietorship concern. Everybody knows this. Despite many advantages in forming a company and doing business, we will see some difficulties in the course of management and the disputes between the majority and the minority shareholders in a company. Fairness in functioning and unbiased management is the underlying principle of company law. Its true that the majority can do many things in a company through AGM, Board resolutions and extraordinary general body meetings. But, the majority or the managerial personnel are not supposed to misuse their position and authority in the company in order to oppress the minority or a group. Some companies are promoted by businessmen and technocrats with a clear intention to have a complete say in the management of the company. These people will form either a private limited company or a closely held public limited company. The difference between the private limited company and the public limited company is, on principles, as follows:
1. The transfer of shares is restricted in private limited companies.
2. The private limited company will be having lot of discretion in prescribing the regulations governing the company.
3. The public limited company can not restrict the transfer of shares normally.
4. The Companies Act itself will deal with many regulations when it comes to the functioning of public limited company.
5. When it comes listed public limited company, the company should follow the SEBI regulations and it needs to comply with the listing agreement entered into with the concerned stock exchanges.
6. The private company can not solicit shares from public like public limited companies.
7. More care is taken by the state in the form of prescribing laws and regulations when it comes to public limited companies and the disclosure requirements are also more in their financial statements.
I have just explained very few differences between the private limited companies and public limited companies. Thus, the intention, normally, behind forming a private limited company or a closely held public company is to have a control over its affairs and management. But, in the course of their management and expansion, there can be difference of opinion between the majority and the minority in a company. As the company is run by professionals called directors and as human mind is so complicated, there is every scope for the differences between or among the shareholders or the differences between the majority and the minority. As per the scheme of company law, fairness and unbiased attitude towards the members is emphasized. Despite the settled company law principles, we see the differences and litigation between majority and minority. The majority may try to oppress the minority and can resort to mismanagement in the company. At times, the minority may oppress the majority using their authority.
Addressing the issue of minority rights and their protection, the Companies Act, 1956 provides a remedy or preventive remedy. Members who are qualified under section 399 of the Act, can approach the Company Law Board seeking such measures under section 397/398 against the majority and in the interests of the Company and in order to put an end to the matters complained of, the Company Law Board can pass such orders including interim measures.
The scheme of section 397/398 of the Act is primarily meant to enable the minority to approach the Board against the misdeeds of majority. It doesn't deal with the issue as to what happens when a majority is oppressed by minority. It may happen at times and the minority can misuse their authority and even try to dilute the shareholding of the majority. All these things are very very complicated. The object behind not mentioning about the rights of the majority in a company, may be, that the majority can not be oppressed as it can do anything through board resolutions, AGM and extraordinary general body meetings. But, practically, it may happen where majority is oppressed by minority and these are the complications of company law or company related issues.
The issue I want to dealwith is with regard to the rights of the majority to question the oppression and mismanagement committed by the minority. Can the majority approach the Company Law Board under section 397/398 of the Companies Act. Yes, it’s true that, at times, it is very difficult to construe the words "minority" and "majority" for the said purpose. But, in a clear case, can majority approach the Board under section 397/398 of the Companies Act alleging some oppression and mismanagement by the minority. Its an interesting question and in my opinion, even the majority can approach the Company Law Board under section 397 and 398 of the Companies Act. The issue is not that much simple, but, I do feel that nothing happens if the majority questions the misdeeds of the minority in the Company under section 397/398 of the Act if such an approach to the Board is otherwise qualified as mandated in the section and the plethora of judgments delivered by various courts and especially the Apex Court.
Dealing with the issue referred to, the High Court of Kerala, in Dr.V.Sebastian and others VS. City Hospital P.Ltd. and others, (1985) 57 Com Cases 453, was pleased to observe/refer that “sections 397 and 398 of the Companies Act, 1956, are intended primarily to protect minority interests. In ordinary cases, the majority will be able to protect itself by controlling the directors at general body meetings. But where the majority is prevented from doing so, despite the clear indication in the articles that majority rule based on the right to demand poll should operate as a correcting influence, the majority becomes an artificial minority entitled to claim protection under ss.397 and 398”. Again, on the same issue, the Company Law Board, in K.N.Bhargava and others Vs. Trackparts of India Limited and others, (2000) 2 Com LJ 275 (CLB), was pleased to observe that“section 399 of the Companies Act, 1956, vests with the shareholders the right to move the Company Law Board in case of oppression under section 397 and in case of mismanagement under section 398. Oppression could be either by the majority against the minority or vice versa and as such it is immaterial as to who is in management while case of mismanagement, it may be relevant. However, when two groups are in management and disputes arise between the two groups, if the same could not be resolved in the domestic forum, then, there can not be any bar in the aggrieved group approaching the Company Law Board even if it is in the management along with other group. In the present case, admittedly, there tare two groups of shareholders directors and one group has approached us with grievances of oppression and mismanagement on the part of the other group. Therefore, as a general proposition, it can not be laid down that the shareholders in management can not file a petition under section 397/398”.
It is really an interesting issue in company law in India and I do strongly feel that nothing will happen if the majority approaches the Company Law Board against the minority questioning the oppression and mismanagement under section 397/398 of the Companies Act, 1956.
Note:
I request the readers to post their comments and views on the issue and let me get enlightened.
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