INTRODUCTION Section 397 of the Companies Act, 1956 that any member of a company who complain that the

affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this Section provided such members have a right so to apply in virtue of Section 399. On application, if the Company Law Board is of opinion that the company affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members and that to win up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up, the Company Law Board may, with a view to bringing an end the matters complained of, make such order as it thinks fit. Section 399 of the Act prescribes the requirements for filing a petition under Section 397 or 398 before the Company Law Board: In the case of a company having a share capital, not less than 100 members of the company or not less than one tenth of the total number of its members, whichever is less or any member or members holding not less than one tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares; In the case of a company not having a share capital, not less than one fifth of the total number of its members; Where any share or shares are held by two or more persons jointly, they shall be counted only as one member; Where any members of a company are entitled to make an application any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them; The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Company Law Board under Section 397 or 398, notwithstanding that the requirements as noted above are not fulfilled; Under Section 401 the Central Government may itself apply to the Company Law Board for an order under Section 397 or 398 or cause an application to be made the Company Law Board for such an order by any person authorised by it in this behalf.

OPPRESSION The meaning of the term oppression was given by Lord Cooper in the Scottish case of Elder v Elder and Watson Ltd1 and was cited with approval by Wanchoo J of the Supreme Court of India in Shanti Prasad Jain v Kalinga Tubes Ltd.2 The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fail dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely. The complaining shareholder must be under a burden which is unjust or harsh or tyrannical.3 A persistent and persisting course of unjust conduct must be shown.4 It is not lack of confidence between the shareholders per se that that brings the section into play Oppression involves at least an element of lack of probity or fair dealing to member in the matter of his proprietary right as a shareholder. Persons concerned with the management of the companys affairs must in connection therewith be guilty of fraud, misfeasance or misconduct towards the members. It does not include mere domestic disputes between directors and members or lack of confidence between one section of members and another section in the matter of policy or administration. Much less it covers mere private animosity between members and directors.5 Oppression may take different forms and need not necessarily be for obtaining pecuniary benefit. It may be due to a desire to obtain power or control.6 The legitimate expectations with which a person joins a company as a member and denial of which may amount to oppression must relate to affairs of the company.7 Where the object of the company was defeated by a highhanded majority by shifting from construction to running hotels to film making the court said that it was an act straight against the expectations of the shareholders in joining the company. It amounted to oppression.8 In the case of Sindri Iron Foundry (P) Ltd, Re.9 the learned judge observed that if the court finds that the companys interest is being seriously prejudiced that two registered offices at two different addresses have been set up, that two rival boards are holding meetings, that the companys assets and property have passed in the hands of unauthorized people who claim to be the shareholders and directors, there is no reason why the court should not make appropriate orders to put an end to such matters.

1 2

[1952] SC 49 Scotland [1965] 1 Comp LJ 193: AIR [1965] SC 1535 3 Lord Simons in Scottish Coop Wholesale Society v Meyer, [1958] 3 All ER 66: [1959] AC 324 at 342. 4 H.R. Harmer Ltd, Re, [1959] 1 WLR 62 5 Kalinga Tubes Ltd v Shanti Prasad Jain [1964] 1 Comp LJ 117. The decision was affirmed by the Supreme Court in Shanti Prasad Jain v Kalinga Tubes [1965] 1 Comp LJ 1 Mad. 6 In re, H.R. Harmer Ltd., [1958] 3 All ER 689 7 Leeds United Holdings plc, re [1996] 2 BCLC 545 Ch D. 8 C.N. Shetty v Hillock Hotels Ltd. [1996] 87 Comp Cas 1 AP. 9 [1963] 69 CWN 118. See further, Sebastian v City Hostpital P. Ltd. [1985] 57 Comp Cas 453 Ker; Laxmi Film Lab & Studio (P) Ltd, [1984] 56 Comp Cas 110 Guj.

MISMANAGEMENT This section comes into play when there is actual mismanagement or apprehension of mismanagement of affairs.10 Conditions that prevent the proper functioning of the company, according to the provisions of the Indian Companies Act, the uncertainty as to the de jure character of the Board and difficulty of having the state of affairs rectified in the usual way, the patent fact that the company was being run by the Board in their own interest overriding the wishes and interest of the majority of shareholders were facts from which the court could conclude that the affairs of the company were being conducted in the interest of a group but certainly not of the company. These acts would bring the case within the ambit of Section 398 of the Companies Act. By reason of the change in management, the affairs of the company had been proved of have been conducted in a manner prejudicial to the interest of the company. To satisfy the requirements of Section 398(b) it is enough to establish that there was a likelihood of the affairs of the company being conducted in a manner prejudicial to the interest of the company.11 So also infighting among directors resulting in serious prejudice to the company constitutes mismanagement under Section 398.12 Bona fide decisions consistent with the companys memorandum and articles are not to be equated with mismanagement even if they turn out to be wrong in the circumstances or they cause temporary losses. The court will not permit the machinery created by the section to be used by the minority for compelling the majority to come to terms, where the company is honestly managed. The suspension of business for a short-while need not be an act of management.13 The change in the control and management of the company and the appointment of new directors as a result thereof cannot be questioned under this section, and the court will not interfere with the affairs of a company in a case where the act complained of is not ultra vires the company.14 A bona fide shifting of the registered office of a company, causing no loss to the company has been held to be as not amounting to mismanagement. 15 Removal of some of the directors from office which was found to be valid was held not to be a case of mismanagement of the companys affairs.16 Removal of existing directors and appointment of new directors cannot be challenged in a petition under this section. It is only when the new directors misconduct the affairs of the company that it may be said that they have been working to the prejudice of the company.17 The courts start with the presumption that the directors are acting in the best interest of the company. The burden lies on those to prove the facts who allege that powers have

10 11

Surinder Singh Bindra v Hindustan Fastners [1990] 69 Com Cases 718, 726 (Del) In Re, Albert David, [1964] 68 CWN 163, 172. 12 Suresh Kumar Sanghi v Supreme Motors Ltd. [1983] 54 Com Cases 253 (Del). See also Subir Kumar Basu v New Central Group Engg. P. Ltd., [1986] 59 Com Cases 222 (Cal). 13 C.P. Gnanasambandam v Tamilnad Transports (Coimbatore) (P.) Ltd, (1971) 41 Com Cases 26 (Mad) 14 Thakur Paper Mills Ltd., In re [1975] Tax LR 1656 (Pat) 15 Bagree Cereals P. Ltd. v Hanuman Prasad Bagri [2001] 105 Com Cases 465 (Cal-DB) affirmed on appeal by the Supreme Court in Hanuman Prasad Bagri v Bagree Cereals P. Ltd. [2001] 105 Com Cases 493 (SC) 16 Sidramappa Bapurao Patil v Ratna Cements (Yadwad) Ltd. [1991] 70 Com Cases 27 (Kar) 17 Rai Saheb Vishwamitra v Amar Nath Mehrotra [1986] 59 Com Cases 854 (All)

been exercised in personal interest, or not in the interest of the company or with a view to injuring the interest of the complaining shareholder.18 The courts will not, in general, intervene at the instance of shareholders in the matters of internal administration; and will not interfere with the management of a company by its directors so long as they are acting within the powers conferred on them under the articles of the company. 19 Nothing connected with the internal disputes between shareholders between the shareholders is to be made the subject of an action by a shareholder.20

18 19

M.L. Thukral v Krone Communications Ltd. [1996] 86 Com Cases 648 (Kant) Rajahmundry Electric Supply Corpn v A. Nageshwara Rao AIR [1956] SC 213: [1956] 26 Comp Cas 91 20 MacDougall v Gardiner [1875] 1 Ch D 13: [1874-80] All ER Rep Ext 2248

"MAJORITY RULE" AS APPLIED IN THE MANAGEMENT OF A COMPANY The Companies Act, 1956, together with the protection granted to minority under the Common Law, attempts to maintain a balance between the rights of majority and the minority shareholders by admitting in the rule of the majority but limiting it at the same time by a number of well-defined minority rights, and thus protecting the minority shareholders. Minority shareholders are protected by: 1. The Common Law; and 2. The provisions of the Companies Act, 1956. Protection at Common Law It is a well-known principle, enunciated in Foss vs. Harbottle, which the rule of majority shall prevail. But there are certain exceptions to this rule where the majority rule does not prevail. These are as under: (a) Where the act complained of is illegal or ultra vires the company; (b) Where the act done by the majority constitutes fraud on the minority; (c) Where a resolution is passed by a simple majority for any act, which requires special resolution for it to be effective; (d) Where the act infringes the personal rights of an individual member; (e) Where any act amounts to oppression of minority or mismanagement of the affairs of the company. In all these cases a minority shareholder is entitled to bring an action for a declaration that the resolution complained of is void, or for an injunction to restrain the company from passing it. All these principles have been followed in a few leading cases in India as well.

Protection under the Companies Act, 1956 Various rights are given to minority shareholders by the Companies Act, 1956. These relate to: (a) The variation of class rights (Section 107) (b) Schemes of reconstruction and amalgamation (Section 391) (c) Prevention of oppression of minority and of mismanagement under Sections 397 and (d) The rights to apply to the Central Government to have the affairs of the company investigated. (Section 235) There are some other Sections of the Companies Act,1956 which protect the minority shareholders rights .

WHO MAY APPLY TO THE COMPANY LAW BOARD WHEN OPPRESSION OR MIS- MANAGEMENT IS COMPLAINED OF? The application can be made only by: (a) In the case of a company having a share capital: (i) not less than one hundred members or not less than one tenth of the total number of members whichever is less; or (ii) a member or members holding not less than one-tenth of the issued share capital of company provided that the applicants have paid all calls and other sums due on their respective share [Section 399(1)(a)]. It may be noted that joint members are counted as one member. (b) In the case of a company not having a share capital: not less than one-fifth of the total number of members [Section 399(1)(b)]. (c) The Central Government: The Central Government can also apply or authorise a member or members to make an application under Section 397 or 398, though the requisite conditions under [a] and [b] are not satisfied [Section 399(4)]. An application under Section 399(4) must contain the names and addresses of the applicants, the total numbers of applicants, etc., it must be verified by an affidavit. The Central Government may require the applicant to produce documentary evidence in support of the complaint [Section 399(4); Rule 13 of the Companies (Central Govt.'s) General Rules and Forms, 1956]. It may also require the members to give security for costs [Section 399(5)].

DIFFERENCE BETWEEN SECTIONS 397 AND 398 Under Section 397, the existence of conditions justifying the making of winding up order on the ground that it is just and equitable that the company should be wound up, is a condition precedent to the interference by the Company Law Board. On the other hand, under Section 398, the C.L.B. would interfere on its being satisfied that by reason of any material changes in the management or control of the company, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company. The two positions are distinct. Whereas in the first case, the C.L.B. acts to prevent injustice being done to a member or members in his or their individual capacity, in the second case the C.L.B. acts in order to prevent injury being inflicted to the interest of the company as a whole. The material change in the management or control contemplated in the preceding paragraph will be deemed to have taken place in any of the following circumstances, viz.: (i) when there has been alteration in the Board of Directors; (ii) when a replacement of its manager has taken place; (iii) when a change has occurred in the ownership of the shares of the company; (iv) when there has been a change in the membership of a company having no share capital; (v) when a change has taken place in any other manner whatsoever; (vi) by reason of any of the aforesaid changes, the affairs of the company are likely to be conducted in manner prejudicial to public interest or to the interest of the company [Section 398(1)(b)].

Thus on an application made in the foregoing circumstances, the Company Law Board will interfere only if it is of the opinion: (1) When it is made under Section 397: (a) that the company's affairs are being conducted in a manner oppressive to any member or members [Section 397(2)] or in a manner prejudicial to public interest; and (b) that to wind up the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding up order on "just and equitable" ground. (2) When it is made under Section 398: (a) That affairs of the company are being conducted in a manner prejudicial to the interests of the company [Section 398(1)(a)]; or (b) That a material change has taken place in the management or control of the company and as a consequence the affairs of the company may be conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interests of the company [Section 398(1)(b)]. The Company Law Board may make such order it thinks fit with a view to bringing to an end, or preventing the matters complained or apprehended, as the case may be. (3) Under Section 397, the Company Law Board can end the oppression complained of whereas, under Section 398, it can prevent the matters complained of or apprehended. In other words, only Section 398 is preventive; Section 397 is not. A complaint under Section 398 can be made only by a member or members and not by officers or directors who might be oppressed in these capacities [Elder vs. Elder & Weston Ltd. (1952) 102 Law J. 91; (1952) S.C. 49] . In the aforementioned case, the interpretation of Section 210 of the English Companies Act, 1948, corresponding to Section 397 of our Act, was considered. There it was alleged that the majority of the shareholders of a private company had removed two minority shareholders from their directorship and employment but there was no suggestion of mismanagement to the detriment of the share holders. The Court held that these allegations could not support an application under the Section, which required oppressive conduct to members in their character as members. Such conduct towards a member in any other capacity, e.g., as a director or creditor could not per se justify an application. The "conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company, is entitled to rely" (ibid) (per Lord Cooper).

POWERS OF THE COMPANY LAW BOARD ON APPLICATION UNDER SECTIONS 397 OR 398 Without prejudice to the generality of the powers of making any order as it thinks fit under Section 397 or 398 the C.L.B. has, in particular under Section 402, the following powers: (a) To regulate by order the conduct of the company's affairs in the future; (b) To order the purchase of shares or interest of any member or members of the company by the other members thereof or by the company; (c) In the case of a purchase of shares by the company as aforesaid, to order the consequent reduction of its share capital; (d) To terminate, set aside for modify any agreement, howsoever, arrived at, between the company on the one hand and any of the following persons on the other, namely: (i) the managing director; (ii) any other director; (iii) the manager upon such terms and conditions as may, in the opinion of the Company Law Board be just and equitable in all the circumstances of the case; (e) To terminate, set aside or modify any arrangement between the company and any person not referred to above, after giving due notice to, and obtaining the consent of the party concerned; (f) To set aside any transfer, delivery of goods, payment, execution of other act, relating to property made or done by or against the company within 3 months before the date of the application under Section 397 or 398 which would in the case of an individual be deemed in his insolvency to be fraudulent preference; and (g) To deal with any other matter for which, in the opinion of the C.L.B., it is just and equitable that provision should be made. The C.L.B. may make an interim order for regulating the conduct of the company's affairs, pending the passing by it of a final order under Section 397 or 398 (Section 403). Where an order made under Section 397 or 398 involves an alteration of the memorandum or articles of association of the company, the company shall not have the right to make any alteration therein, subsequently, in a manner which is inconsistent with the order passed by the C.L.B. without its leave (Section 404). Certified copies of the alteration must be filed with the Registrar. Where, an order of the Court under the foregoing Section involves the termination of any of the agreement mentioned herein before, such termination shall not give rise to any claim for damages against the company for loss of office or in any other respect either under the agreement or otherwise. Further, no managing or other directors or manager whose agreement has been terminated or set aside shall, without leave of the C.L.B. be appointed in any of the above capacity in respect of the company for a period of five years from the date of the order. Any contravention of this provision is punishable with imprisonment for a term, which may extend to one year, or with a fine up to ` 50,000 or with both. Before leave is granted, the Central Government must be notified and heard (Section 407).

POWERS OF THE CENTRAL GOVERNMENT Section 408 has vested some powers in the Central Government to prevent oppression or mismanagement. It can exercise these powers on an order of the Company Law Board which is turn will so order on the application of at least 100 members of the company or of members holding at least one tenth of the total voting power therein. But before exercising such powers, it must make such enquiry as it deems fit and be satisfied that it is necessary to exercise its powers in order to prevent the affairs of the company being conducted either in a manner oppressive to any members of the company or in a manner prejudicial to the interests of the company or to public interest. Being thus satisfied, it may appoint such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interest of the company, or its shareholders or the public interest, as directors thereof for such period not exceeding three years at one time as it may think fit [Section 408(1)]. In the alternative, the company may be asked to elect its directors by the system of proportional representation by means of a single transferable vote so that the minority may also have representation in the Board of Directors of the company [Proviso to Section 408]. If the Company Law Board has passed an order the proviso to Section 408(1), it may, should it deem fit, direct that until new directors are appointed pursuant to the aforesaid order, such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interest of the company, or its shareholders or the public interest will hold office as additional directors. The Central Government shall appoint such Additional Directors. The director or directors appointed under sub-section (1) or (2) or Section 408 are not liable to retire by rotation as contemplated by Section 255 [Section 408(3)]. These directors are not required to hold any qualification shares; nor are their tenure of office liable to termination by retirement of directors by rotation. These directors may, however, be replaced by some others by the Central Government [Section 408(4)]. No change in the Board of Directors, after a person has been appointed or directed to hold office of a director or additional director under Section 408 shall so long as such director or additional director holds office, be effective unless confirmed by the Company Law Board [Section 408(5)]. On appointing directors or additional directors referred to in the first two sub-sections above, the Central Government may issue such directions to the company as it may consider necessary or appropriate in regard to its affairs. Such directions can be issued notwithstanding anything contained in this Act or in any other law for the time being in force [Section 408(6)]. The Central Government may require these directors or additional directors to report to it from time to time with regard to the affairs of the company [Section 408(5)]. On a complaint being lodged by the managing or any other director or the manager, the Company Law Board is empowered under Section 409 to prevent any change in the Board of Directors, which is likely to affect the company prejudicially. The power conferred by this Section, however, cannot be exercised in relation to a private company, unless it is a subsidiary of a public company.

GENERAL OBSERVATIONS ON REMEDY FOR OPPRESSION UNDER SECTIONS 397 AND 398 The remedy available under Section 397 of the Companies Act, 1956, can be invoked only when the affairs of the company are being conducted in a manner oppressive to a shareholder or shareholders. Likewise, the remedy available under Section 398 can be invoked only when the affairs of the company are being conducted in a manner prejudicial to the interest of the company. These two Sections clearly postulate that at the time application is made, there must be a continuing course or conduct of the affairs the company, which is oppressive to any shareholder or shareholders or prejudicial to the interest of the company. It is this course of oppressive or prejudicial conduct, which can be made the subject matter of a complaint in the application. The forgoing provisions of law do not confer any power on the Company Law Board to set aside or interfere with past and concluded transactions between the company and the shareholders or third parties which are no longer continuing wrongs or to award a compensation to the company for the aggrieved shareholders in respect of such transactions [Seth Mohanlal Ganpatram vs. Shri Satyaji Jubilee Cotton and Jute Mills Co. Ltd. (1964) 34 Comp. Cas 777]. There are only two cases in which, on the application under Section 397 or 398 of the Companies Act, 1956 the Company Law Board is empowered to give relief in respect of past and concluded transactions which are no longer continuing wrongs; they are really in the nature of exceptions to the general principles as stated above. Firstly, Section 402(f) enables the Company Law Board to set at naught transactions amounting to fraudulent preference, effected within three months before the date of the application under Section 397 or 398 even though they are no longer continuing wrongs. Secondly, Section 406 of the Companies Act, 1956, read with Section 543 of that Act set forth in Schedule XI enables Company Law Board on an application under Section 397 or 398 to bring to book delinquent directors, managers and other office-bearers of the company and to enforce the company's claim against them if they have misapplied or retained company's money or have committed any misfeasance or breach of trust in relation to the company [Seth Mohanlal Ganpatram vs. Shri Satyaji Jubilee Cotton and Jute Mills Co. Ltd. and others, ibid]. Persons who hold majority of beneficial interest but minority of voting power, can complain of oppression which term includes not merely obtaining unfair pecuniary advantage but also an over whelming desire for power (re Hammer Ltd. 109 L.J. 24 C.A.). The remedy available is analogous to that of winding up and, consequently, Section 406 provides that Sections 439 to 544 shall only apply to companies in respect Of which application has been made under Section 397 or 398 in form set forth in Schedule XI. Before seekin a winding up, a member must exhaust his remedy under Section 397 [See Section 433(f)].

CONCLUSION The management of companies is based on the principle of majority rule ordinarily; decision of the majority is the rule for the minority. This sound principle has, occasionally, been abused and the whip of the majority has often produced sullen effects, prejudicial to the best interests of the shareholders. Until the commencement of the Companies Act, 1956 the only remedy available (under the Indian Companies Act, 1913) to an oppressed minority was to petition to the Court to wind up the company on the ground that it was "just and equitable" so to do. The winding up remedy is, however, not always advantageous to the petitioning shareholder, or shareholders because the very persons whose conduct is complained of, may be the only persons capable of buying up the shares of the dissentients. Nevertheless, the oppression or mis-management calls for some remedial action. Sections 397 to 409 of the Companies Act, 1956 empower (i) the Company Law Board and (ii) the Central Government to deal with such situations. Section 397 provides that the members of a company who complain that the affairs of the company are being conducted in a manner oppressive to any member or members may apply to the Company Law Board for appropriate relief subject to Section 399. Under Section 398 too, members of a company may apply to the Company are being conducted in a manner prejudicial to the interest of the company as a whole, subject to Section 399. Section 399 provides, however, that a single member is not entitled to make an application under either of the Section, viz., Sections 397 and 398.

REFERENCES Bhandari MC and Makheeja RD, Guide to Memorandum, Articles & Incorporation of Companies (4th edn, Wadhwa & Company, Nagpur 2005) Bhandari MC, Guide to Company Law Procedures (20th edn, Lexis Nexis Butterworths Wadhwa, Nagpur 2008) Datta CR, The Company Law vol 3 (6th edn, Wadhwa & Company, Nagpur 2008)

Dictionaries: Oxford Advanced Learners Dictionary (8th edn, 2010) Black's Law Dictionary (9th edn ,2009)

Websites and URLs: V.Durga Rao Is relief under section 397/398 of the Companies Act, 1956 effective? <http://toostep.com/insight/is-relief-under-section-397-398-of-thecompanies-act-1956-ef> accessed on 21st of January, 2012 <http://www.companyadvice.com/sbi_mgmtcompany.htm> accessed on the 20th of January, 2012

< http://220.227.161.86/21687pm_cl_finalnew_cp22.pdf> accessed on the 22nd of January, 2012 < http://clb.nic.in/sections/Ultrafilter_397_398.htm> accessed on the 22nd of January, 2012 < http://indiancorporatelaws.blogspot.in/> accessed on the 23rd of January, 2012